MIE 754 Class

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MIE 754 - Class 1 Manufacturing Engineering
Economics

• Professor Dr. Janis Terpenny
• Office 120 E Marston Hall
• Office Hrs 10am-12 noon Tues Thurs
• E-mail terpenny_at_ecs.umass.edu
• Phone [phone] (office)
• [phone] (home)

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Course Description

• This course examines the monetary and
  non-monetary considerations necessary in
  strategic decision making
• Engineering economic principles developed and
  applied throughout life-cycle phases
• design and development, production, construction,
  utilization, support, phase out and disposal
• consideration of risk and uncertainty

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Course Description

• Textbook
• Canada, John R., Sullivan, William, G., and
  White, John A. Capital Investment Analysis for
  Engineering and Management, Second Edition,
  Prentice Hall, Inc., 1996, (ISBN 0-13-311036-2)
• Additional handouts distributed as needed
• Prerequisites
• None
• Undergraduate course in engineering economics
  would be helpful

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Topics Covered

• Introduction and Overview
• Review of Engineering Economy Basics
• The Economics of Engineering Design
• Cost Estimating and Management
• Replacement Analysis
• Dealing with Risk and/or Poor Estimates
• Decision Analysis for Complex and Multiple
  Attributes Problems
• Revenue Expansion vs Cost Reduction

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Grading

• Mid-term Exam1 20
• Final Exam1 20
• Assignments 30
• Graded Assignments 20
• Homework check 10
• Term Project 30
• 1 Exams are take home

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GROUND RULES

• There are no dumb questions
• We criticize ideas, not people
• Let's all be considerate of one another
• It is OK to tell the instructor we're out of time
  
• If you need to leave class, do so quietly
• Please don't talk while others are talking
• Be patient and kind to one another especially
  to the instructor

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Course Web Sitehttp//mielsvr2.ecs.umass.edu/vir
tual_econ/
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Homework 1Mini Biography Who are you?

• Current Position
• Degree Pursuing
• Career Objectives
• Outside Interests
• Why are you taking MIE 754?
• Due 1 week from today
• Send via e-mail attachment (preferred), or
• Submit hardcopy (in-class or through VIP)

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Engineering Economy is Problem Solving

• Engineering is a profession devoted to problem
  solving and design of alternative courses of
  action.
• Engineering economy is a subset of engineering
  devoted to deciding which course of action best
  meets technical performance criteria while using
  capital in a prudent manner.

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Engineering Economy is Problem Solving

• A problem is a perception of a gap between the
  present and some desired state of affairs.
• Three conditions characterize a problem
• Alternative courses of action are available,
• The alternative selected has a significant effect
  on the future, and
• The best alternative to select is not apparent.

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Problem Examples ?

• From
• Industry
• Government
• Personal

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Engineering economics is more than evaluating
investment problems ...

• Most engineers end up designing systems,
  equipment, processes, etc., it is imperative that
  we ask will it pay in the context of design?
  Why? Approximately 80-85 of a product's life
  cycle cost is determined during preliminary and
  detailed design activities. Think about it!
  Engineers make multi-million dollar decisions
  every minute perhaps without realizing it.
• Let's learn to make these decisions wisely!

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Engineering Economics Analysis Procedure

• Problem recognition, formulation, and evaluation
• Development of feasible alternatives
• Development of the net cash flow for each
  alternative
• Selection of a criterion (or criteria)
• Analysis and comparison of the alternatives
• Selection of the preferred alternative
• Performance monitoring and post evaluation of
  results

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Basic Principles of Economic Analysis

• Develop the Alternatives
• Focus on the Differences
• Use a Consistent Viewpoint
• Use a Common Unit of Measure
• Consider all Relevant Criteria
• Make Uncertainty Explicit
• Revisit Your Decisions

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Recognition of a Problem Opportunity

• 1st step of rational decision making
• Obvious problem opportunities
• Examples?
• Non-obvious problem opportunities
• Examples?

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Generation of Alternatives

• Use Imagination and Creativity
• State Problem and Objectives Clearly
• Identify Classes of Alternatives
• Identify Variations for Each Class

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Estimates in Economic Analysis

• Alternatives are based on estimates about the
  future
• Poor estimates lead to poor analysis
• Sources of data for estimates accounting
  records, statistical, economic, engineering data,
  good judgment

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Speaking a Common Language Cost Terminology

• Fixed/Variable Costs - If costs change
  appreciably with fluctuations in business
  activity, they are variable. Otherwise, they
  are fixed. A widely used cost model is Total
  Costs Fixed Costs Variable Costs
• Recurring/Nonrecurring Costs - If costs are
  repetitive and occur when an organization
  produces goods or services on a continuing basis,
  they are recurring. Otherwise they are
  nonrecurring.

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Cost Terminology

• Direct/Indirect Costs - If costs can be
  reasonably measured and allocated to a specific
  output, they are direct. Otherwise they are
  indirect. Examples?
• Overhead Costs - All costs of providing goods or
  services other than direct labor and direct
  material. Indirect costs are a subset of
  overhead costs. Fixed overhead relates more to
  plant capacity than production volume (variable
  overhead). Examples?

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Cost Terminology

• Allocation of overhead to specific outputs may be
  in proportion to
• 1. Direct labor hours
• 2. Direct material costs
• 3. Machine hours
• Total Cost Direct Material Direct Labor
  Overhead

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Cost Terminology

• Sunk Costs - Past costs that are unrecoverable
  and are not relevant for decision making
  purposes.
• Suppose the heating, ventilating and air
  conditioning system in your home has just
  experienced a major failure. You immediately
  call the Breath Easy Company for an estimate to
  replace your system. Their price is 4,200 and
  you gladly sign a contract and write a check for
  the required 1,000 down payment. At this point
  the weather warms and the urgency for replacement
  of your defunct system eases somewhat. You then
  get a second estimate for a new HVAC system. It
  is 3,000. You call Breath Easy back and they
  inform you that the 1,000 down payment is not
  refundable! What should you do? Explain.

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Cost Terminology

• Opportunity Costs - The cost of forgoing the
  chance to earn interest (or profit) on investment
  funds.
• Question Is it in my best interest to keep my
  home because it is all paid for? Im a retired
  person living with my son, and I have rented my
  former home, valued at about 185,000, for 400
  per month.

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Cost Terminology

• There is little reason to continue owning your
  former home as a rental. To see this, consider
  the opportunity cost, i.e., the return you are
  giving up, of ownership. The same 185,000
  invested in secure U.S. Treasury bonds at 7 will
  provide almost 13,000 in yearly income. This is
  many times what is obtained from continual
  rental.
• Your Thoughts?