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Engineering Economics

The document discusses three ways that economic analysis is used in the automotive manufacturing industry: 1) Cost analysis is used to evaluate design alternatives during product development. 2) Investment appraisal techniques are used to analyze capital expenditures. 3) Life cycle costing considers total ownership costs over a product's lifetime to inform pricing, warranty, and service decisions.

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36 views5 pages

Engineering Economics

The document discusses three ways that economic analysis is used in the automotive manufacturing industry: 1) Cost analysis is used to evaluate design alternatives during product development. 2) Investment appraisal techniques are used to analyze capital expenditures. 3) Life cycle costing considers total ownership costs over a product's lifetime to inform pricing, warranty, and service decisions.

Uploaded by

aman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Question (1)

1. Ford:
• Sales: $550,000
• Variable Cost: $600,000
• Fixed Cost: $425,000
a) P.V. Ratio = (Sales - Variable Cost) / Sales
= (550,000 - 600,000) / 550,000
= -50,000 / 550,000
= -0.091 or -9.1% (Since it's negative, it means loss)
b) Contribution = Sales - Variable Cost
= 550,000 - 600,000
= -50,000 (Loss)
c) Break-Even Point (BEP) = Fixed Cost / (Sales price per unit - Variable cost
per unit)
= 425,000 / (550,000 - 600,000)
= 425,000 / (-50,000)
= Not applicable (since BEP cannot be calculated for loss)
d) Profit = Sales - Variable Cost - Fixed Cost
= 550,000 - 600,000 - 425,000
= -475,000 (Loss)
e) Margin of Safety = (Actual Sales - Break Even Sales) / Actual Sales * 100%
= (550,000 - 0) / 550,000 * 100%
= 100%
2. GMC:
• Sales: $650,000
• Variable Cost: $725,000
• Fixed Cost: $250,000
a) P.V. Ratio = (Sales - Variable Cost) / Sales
= (650,000 - 725,000) / 650,000
= -75,000 / 650,000

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= -0.115 or -11.5% (Loss)
b) Contribution = Sales - Variable Cost
= 650,000 - 725,000
= -75,000 (Loss)
c) Break-Even Point (BEP) = Fixed Cost / (Sales price per unit - Variable cost
per unit)
= 250,000 / (650,000 - 725,000)
= 250,000 / (-75,000)
= Not applicable (since BEP cannot be calculated for loss)
d) Profit = Sales - Variable Cost - Fixed Cost
= 650,000 - 725,000 - 250,000
= -325,000 (Loss)
e) Margin of Safety = (Actual Sales - Break Even Sales) / Actual Sales * 100%
= (650,000 - 0) / 650,000 * 100%
= 100%
3. Chrysler:
• Sales: $725,000
• Variable Cost: $350,000
• Fixed Cost: $250,000
a) P.V. Ratio = (Sales - Variable Cost) / Sales
= (725,000 - 350,000) / 725,000
= 375,000 / 725,000
≈ 0.517 or 51.7%
b) Contribution = Sales - Variable Cost
= 725,000 - 350,000
= 375,000
c) Break-Even Point (BEP) = Fixed Cost / (Sales price per unit - Variable cost
per unit)
= 250,000 / (725,000 - 350,000)

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= 250,000 / 375,000
≈ 0.667 or 66.7%
d) Profit = Sales - Variable Cost - Fixed Cost
= 725,000 - 350,000 - 250,000
= 125,000
e) Margin of Safety = (Actual Sales - Break Even Sales) / Actual Sales * 100%
= (725,000 - 375,000) / 725,000 * 100%
≈ 48.28%

Now, let's compile the data into a comparison table:

P.V. Break- Margin of


Contribution
Company Ratio Even Profit ($) Safety
($)
(%) Point (%) (%)

Ford -9.1 -50,000 N/A -475,000 100


GMC -11.5 -75,000 N/A -325,000 100
Chrysler 51.7 375,000 66.7 125,000 48.28

Conclusion: Based on the analysis, Chrysler appears to be the preferable option as it


has a positive profit and a significant margin of safety compared to Ford and GMC,
both of which are incurring losses.

|Page3
Question (2)
Analysis for Year 2020:
Given:
- Sales in 2020 = $25,000
- Profit in 2020 = $2,500
Profit Volume Ratio (P.V. Ratio):
P.V. Ratio = (Profit / Sales) * 100%
= (2,500 / 25,000) * 100%
= 10%
Fixed Cost:
Fixed Cost = Total Cost - Variable Cost
= Total Profit - Profit
= $25,000 - $2,500
= $22,500
Break Even Sales:
Break Even Sales = Fixed Cost / P.V. Ratio
= $22,500 / 10%
= $225,000
Company Profit when Sales is $55,000:
Profit = (P.V. Ratio * Sales) / 100%
= (10% * $55,000) / 100%
= $5,500
Sales when Profits are $7,500:
Sales = (Profit * 100%) / P.V. Ratio
= ($7,500 * 100%) / 10%
= $75,000

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Question (3)
Industry: Automotive Manufacturing
1. Cost Analysis in Product Development: Engineering economy techniques are
employed to evaluate the cost-effectiveness of various design alternatives
during product development.

2. Investment Appraisal for Capital Expenditure: Automotive manufacturers


frequently face decisions regarding capital investments in new facilities,
equipment, or technology upgrades.
3. Life Cycle Costing: Automotive companies consider the total cost of ownership
over a product's life cycle, including acquisition, operation, maintenance, and
disposal costs. Life cycle costing methodologies enable manufacturers to make
informed decisions regarding product pricing, warranty policies, and
aftermarket services.

|Page5

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