The George Washington University School of Engineering

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The George Washington UniversitySchool of
Engineering Applied ScienceDepartment of
Electrical Computer EngineeringEngineering
Economic Analysis Cost Estimation ECE-157 -
Fall 2006Prof. T. J. Manuccia
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Economic Analysis

• The economic analysis of an engineering project
  can be performed in numerous ways.
• For ECE 156-7-8, we want you to estimate
• Cost to develop one or more prototypes
• Cost for the production of a specified number of
  units
• Packaging costs
• Distribution costs
• Estimated wholesale price (per unit only)
• Estimated retail price (per unit only)
• The first four costs above can be expressed as
  either
• Total, i.e., the total cost for all units
  produced
• Per unit, i.e., total divided by the number of
  units produced.

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Labor Costs Impact All Phases of Product
Development

• Technical personnel are needed for the
  development of the prototype.
• They fall in different labor categories with
  different salaries
• Project Manager 66/hr ( 132k /yr)
• Design Engineer 57/hr ( 114k /yr)
• Hardware Engineer 48/hr ( 96k /yr)
• Software Engineer 40/hr ( 80k /yr)
• Test Engineer 36/hr ( 72k /yr)
• Technical Writer 30/hr ( 60k /yr)
• For simplicity in this classroom setting, we will
  explicitly consider ONLY the above labor
  categories in development of the prototype.
• You will assume each of the above rolls as you
  work on your own project.

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Salaries Other Direct Costs Need To Be Loaded
To Be Converted to Cost to the Contract (p.1)

• Indirect costs
• Fringe benefits Services or benefits provided
  to employees
• Health Insurance, Payroll Taxes, Pension
  Contribution, Paid Absences, etc
• Overhead Costs associated with the performance
  of a project
• Facility Costs (rent, heat, electricity, etc.)
• General Laboratory Supplies, etc.
• GA - Costs associated with the overall
  management / administration of an organization
• Office supplies and equipment
• PCs, Xexoxes, Fax machines, paper, etc.
• Staff not directly charging to projects
• Secretaries, top management marketing
  personnel, etc.
• Fee (i.e., built-in profit margin)
• Cost of money (i.e., if money is borrowed to
  solve short term cash flow problems at the start
  of a project).
• Estimated annual inflation on multi-year projects

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Salaries Other Direct Costs Need To Be Loaded
To Be Converted to Cost to the Contract (p.2)

• For the purpose of this class we will approximate
  the actual conversion from salary to contract
  charges by a single multiplier factor of 2.8.
• Example An employee with a 100/hr salary would
  charge the contract 280/hr
• The multiplier ranges from 2.0 to 3.3 in
  industry with higher numbers typically found in
  high tech or top-heavy consulting firms, lower
  numbers in production facilities.
• The multiplier is considerably lower in
  academia, but one must be careful since the
  details of how different direct costs are loaded
  can be different from the commercial sector.

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Prototype Cost

• Calculate time and salary for each of the various
  labor categories
• 3 Technical writers at 30/hour times 10 hours
  900
• 1 SW engineer at 40/hr times 100 hours 4000
• Create totals for hours and for total salary
• Total hours 130
• Total salary 4900
• Multiple your salary total by 2.8 to calculate
  how much these individuals will cost the contract
• Labor charged to contract 13,720
• Add the cost of all parts and external services
  needed to produce the final, pre-manufacturing
  prototype
• Parts total 1000
• Machine shop, PCB fabrication and population
  2000
• Total 3000
• Add to this a 5 pass-through fee
• 5 of 3000 150
• Add all of the above to calculate your prototype
  cost

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Production Costs - Labor (p.1)

• Note the different labor categories, salaries,
  and multiplier in a production environment
  versus in an engineering / development operation.
• Manufacturing Process Development and
  Verification Estimate total time, then multiple
  by a salary of 20/hr
• Example 100 hours mfg verification X 20/hr
  2000
• Software Testing Estimate total time, then
  multiply by a salary of 15/hr
• Example 300 hours SW verification X 15/hr
  4500
• Use a multiplier of 2.0 for the above labor
  categories.
• Example Production labor cost 6500 X 2.0
  13,000

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Production Costs Non-labor (p.2 - continued)

• Add the cost of parts in an appropriate quantity
  (eg, 1,000 units) for full scale production.
• Example Parts 10/unit x 1,000 units
  10,000
• Note Parts ordered in large quantities will be
  less expensive.
• Estimate the costs of (a) printing the necessary
  documentation and (b) packaging for distribution.
• Example Printing Packaging 1/unit x 1000
  units 1000
• Note 1/unit is intentionally wrong Its just
  a placeholder.
• I want students to provide me with a better
  estimate of this number, explain why theirs is
  better.
• Sum the labor and non-labor production costs
  (above)
• Add overhead costs of 40, and then a profit
  (fee) of 20
• Example (13,000 10,000 1,000) x 1.4 x
  1.2 40,320
• Express the cost of production in per unit.
• Example 40,320 / 1000 40.32 / unit

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Estimation of Total Cost of The Project

• Add together the cost of the prototype to the
  cost of production for the stated number of units
  to obtain the total cost of the project
• Example 16,870 40,320 57,190
• Also express the total cost of the project in
  dollars per unit
• Example 57,190 / 1000 57.19 / unit

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Estimation of Minimum Wholesale and Retail
PricesThe High Cost of Distribution

• Start with total product cost per unit
• Example 57.19 / unit
• Add 20 for wholesaler
• Example Wholesale price 57.19 x 1.2 68.62
  / unit
• Add 50 for Retailer
• Example Retail price 68.62 x 1.5 102.94 /
  unit
• Note The retail price is 10x the price of
  parts!!!