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Sample Problems On Economy Studies

1. The document presents 4 sample problems related to economy studies. Problem 1 deals with minimizing the total cost of operating a ship based on velocity. Problem 2 compares the costs of 2 designs for a fastening pin. Problem 3 calculates the extra fuel costs of traveling at a higher speed. Problem 4 analyzes which mining method maximizes profits. 2. Problem 2 determines that design B should be selected since it has a lower total cost per unit compared to design A. The annual savings of design B is $5,081.25. 3. For problem 4, the analysis shows that method 1 (recovering 62% of ore) maximizes total profits from the mine compared to method 2 (recovering 50%

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92 views17 pages

Sample Problems On Economy Studies

1. The document presents 4 sample problems related to economy studies. Problem 1 deals with minimizing the total cost of operating a ship based on velocity. Problem 2 compares the costs of 2 designs for a fastening pin. Problem 3 calculates the extra fuel costs of traveling at a higher speed. Problem 4 analyzes which mining method maximizes profits. 2. Problem 2 determines that design B should be selected since it has a lower total cost per unit compared to design A. The annual savings of design B is $5,081.25. 3. For problem 4, the analysis shows that method 1 (recovering 62% of ore) maximizes total profits from the mine compared to method 2 (recovering 50%

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potatookun
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SAMPLE PROBLEMS ON

ECONOMY STUDIES
Presented by:
Engr. Juanito S. Chan, PIE
Problem 1
• The cost of operating a large ship (Co) varies as the
square of its velocity (v); specifically, Co = knv2, where n
is the trip length in miles and k is the constant of
proportionality. It is known that at 12 miles/hour, the
average cost of operation is $100 per mile. The owner of
the ship wants to minimize the cost of operation, but it
must balanced against the cost of the perishable cargo
(Cc), which the costumer has set at $1,500 per hour. At
what velocity should the trip be planned to minimize the
total cost (CT), which is the sum of the cost of operating
the ship and the cost of perishable cargo?
Solution to Problem 1
Solution to Problem 1 Cont…
Solution to Problem 1 Cont…
Problem 2
• Two alternative designs are under consideration
for a tapered fastening pin. The fastening pin are
sold for $0.70 each. Either design will serve
equally well and will involve the same material
and manufacturing cost except for lathe and drill
operations.
• Design A will require 16 hours of lathe time and
4.5 hours of drill time per 1,000 units. Design B
will require 7 hours of lathe time and 12 hours of
drill time per 1,000 units.
Problem 2
• The variable operating cost of the lathe,
including labor, is $18.60/hour. The variable
operating cost of the drill, including labor, is
$16.90/hour. Finally, there is a sunk cost of
$5,000 for Design A and $9,000 for Design B
due to obsolete tooling.
a. Which design should be adopted if 125,000 units
are sold each year?
b. What is the annual saving over the other design?
Solution to Problem 2
• Strategy: Select the design which
minimizes total cost for 125,000 units/year
(Rule 2). Ignore the sunk costs because
they do not affect the analysis of future
costs.
Solution to Problem 2 Cont…
Design A
•Total cost/125,000 units = (16 hrs/1,000 units)
($18.60/hr)(125,000) + (4.5 hrs/1,000 units)
($16.90/hr)(125,000) =
$46,706.25, or $0.37365/unit
Design B
•Total cost/125,000 units = (7 hrs/1,000 units)
($18.60/hr)(125,000) + (12 hrs/1,000 units)
($16.90/hr)(125,000)
= $41,625, or $0.333/unit
Solution to Problem 2 Cont…
• Since the cost per unit of Design B is less
than that of A, therefore, we select Design
B.
Savings of Design B over Design A are:
• Annual savings (125,000 units) =
$46,706.25 - $41,625 = $5081.25
or, savings/unit = $0.37365 - $0.333 =
$0.04065/unit.
Problem 3
• The speed of your automobile has a huge
effect on fuel consumption. Traveling at 65
miles per hour (mph) instead of 55 mph
can consume almost 20% more fuel. As a
general rule, for every mile per hour over
55, you lose 2% in fuel economy. For
example, if your automobile gets 30 miles
per gallon at 55 mph, the fuel consumption
is 21 miles per gallon at 70 mph.
Problem 3
• If you take a 400-mile trip and your
average speed is 80 mph rather than the
posted speed limit of 70 mph, what is the
extra cost of fuel if gasoline costs $3.00
per gallon? Your car gets 30 miles per
gallon (mpg) at 60 mph.
Solution to Problem 3
• At 70 mph your car gets 0.8 (30 mpg) = 24 mpg
and at 80 mph it gets 0.6(30 mpg) = 18 mpg.
• The extra cost of fuel at 80 mph is:
(400 miles/18mpg – 400 miles/24 mpg)($3.00
per gallon) = $16.67
• The reduced time to make the trip at 80 mph is
about 45 minutes. Is this a good tradeoff in your
opinion? What other factors are involved?
Problem 4
• One method for developing a mine containing an
estimated 100,000 tons of ore will result in the
recovery of 62% of the available ore deposit and
will cost $23 per ton of material removed. A
second method of development will recover only
50% of the ore deposit, but it will cost only $15
per ton of material removed. Subsequent
processing of the removed ore recovers 300 lbs
of metal from each ton of processed ore and
cost $40 per ton of ore processed.
Problem 4
• The recovered metal can be sold for $0.80
per pound. Which method for developing
the mine should be used if your objective
is to maximize total profit from your mine?
Solution to Problem 4
• Assumptions: You can sell all the metal that is
recovered.
• Method 1:
• Recovered ore = (0.62)(100,000 tons) = 62,000 tons
• Removal cost = (62,000 tons)($23/ton) = $1,426,000
• Processing cost = (62,000 tons)($40/ton) = $2,480,000
• Recovered metal = (300 lbs/ton)(62,000 tons) = 18,600,000 lbs
• Revenues = (18,600,000 lbs)($0.8 / lb) = $14,880,000
• Profit = Revenues – Cost = $14,880,000 - ($1,426,000 +
$2,480,000) = $10,974,000
Solution to Problem 4 Cont…
• Method 2:
• Recovered ore = (0.5)(100,000 tons) = 50,000 tons
• Removal cost = (50,000 tons)($15/ton)= $750,000
• Processing cost = (50,000 tons)($40/ton)= $2,000,000
• Recovered metal = (300 lbs/ton)(50,000 tons) = 15,000,000
lbs
• Revenues = (15,000,000 lbs)($0.8 / lb) = $12,000,000
• Profit = Revenues – Cost = $12,000,000 - ($750,000 + $2,000,000)
= $9,250,000
• Select Method 1 (62% recovered) to maximize
total profit from the mine.

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