CTC 475 Review

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CTC 475 Review

• Course Requirements
• Applications
• Multiple Decision Criteria
• Selling The Project
• PSP

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CTC 475

• Cost Concepts

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Objectives

• Understand the concept of money having a time
  value
• Know the definition of several cost concepts

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Economic Analysis

• Relies on economics to justify an alternative
• Estimating and quantifying costs requires
  research
• Company Production Records
• Accounting Records
• Manufacturers Catalogs
• Government Publications
• Need to know cost concepts used in these type of
  reports

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Cost Concepts

• Time Value of Money
• Cost Terminology
• Breakeven Analyses
• Cost Estimates
• Accounting Principles

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Cost Terminology

• Life-Cycle Costs
• Past and Sunk Costs
• Future Opportunity costs
• Direct and Indirect Costs
• Average and Marginal Costs
• Fixed and Variable Costs

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Money has a Time Value

• Would you prefer 100 today or X one year from
  now if X equaled
• 100
• 200
• 1000

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Time Value of Money

• Most people prefer current consumption over
  postponed consumption unless theyre compensated
  at a higher level for waiting

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Cash Flow Diagrams

• Identify cash flows by time
• End of period
• Usually year (EOY)
• Identify viewpoint (person, company, bank)
• Cash flows are placed above the time line mean
  coming in (income)
• - Cash flows are placed below the time line mean
  going out (expenses)

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Cash Flow Tables

• Cash Flow

EOY
0 (2000)
1 200
2 200
3 200
4 200
5 20050
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Life-Cycle Costs

• Sum of all expenditures associated with an item
  during its entire service life
• Item
• Equipment
• Product Line
• Project
• Building
• Bridge
• Process
• Cradle to Grave costs

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Life-Cycle Costs

• First costs
• Design Development
• Purchasing costs
• Fabrication testing
• Training
• Shipping Installation
• Tooling costs
• Supporting Equipment Costs
• Operating maintenance costs (OM)
• Disposal costs

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Life-Cycle costs

• OM costs are usually recurring costs
• Labor
• Materials
• Overhead items (fuel, energy source, insurance,
  etc.
• At disposal, item may have a market or trade-in
  value
• Salvage Value Market Value Disposal Costs

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Past Sunk Costs

• Past costs are historical costs that have
  occurred
• Sunk costs are past costs that are not
  recoverable
• Sunk costs should not be included in an analysis

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Sunk Cost Example

• Investor buys 100 shares of stock (25/share)
• Brokerage Fees are 85
• Total expenditures were 2585

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Sunk Cost Example (Cont.)

• Two months later stock sells for only 20 per
  share but you sell the 100 shares because you
  need the money
• Brokerage Fee for selling the stocks is 70
• Net Loss 2000-70-2585 (655)
• The 655 (capital loss) is a sunk cost because it
  can never be recovered
• Capital losses are sometimes advantageous
• Offsets capital gains
• Future estimates

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Future Costs

• Costs that occur in the future from some
  reference time (t0).
• Future costs may be known (contract, loan, etc.)
• Future costs may be estimated (OM, salvage, etc.)

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Opportunity Costs

• Cost of foregoing the opportunity to earn
  interest, or a return, on investment funds
• MARR minimum attractive rate of return Cost of
  Capital

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Opportunity Cost Example

• You have 20,000 and you purchase a car
• You could have invested the money at 4 per year.
• The opportunity cost per year associated with
  owning the car is 800
• (4 x 20,000800)

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Direct Indirect Costs

• Direct costs (material, labor) are easily
  measured and allocated to a specific operation,
  product, or project
• Indirect costs are impractical or uneconomical to
  allocate to a specific operation, product, or
  project (utilities, insurance, supplies, etc.)
• Indirect costs are sometimes called overhead or
  burden costs

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Average Cost

• Ratio of total cost to quantity of output
• Average costs may change as a function of output
• Avg. operating cost of vehicle may be 0.25 per
  mile if a driver travels 10,000 miles/year
• Avg. operating cost of vehicle may be 0.20 per
  mile if a driver travels 20,000 miles/year

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Marginal (Incremental) Costs

• Cost required to increase the output quantity by
  one
• If the marginal cost is smaller than the average
  cost than an increase in output will result in a
  reduction of unit cost

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Fixed and Variable Costs

• Fixed costs are those which do not vary in
  proportion of the quantity of output
• Insurance
• Building depreciation
• Some utilities
• Variable costs vary in proportion to quantity of
  output
• Direct Labor
• Direct Material

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Fixed Variable Costs

• Fixed costs are expressed as one number
• 200
• Variable costs are expressed as an amount per
  unit
• 10 per unit

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Total Costs (TC)

• Total Costs (TC) over some time period
• Fixed Costs (FC)
• Variable Costs (VC) of Units Produced

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Costs for Owning a VehicleUnit of
ProductionMiles Driven per year

• Fixed
• ?
• ?
• ?

• Variable
• ?
• ?
• ?

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Next lecture

• Breakeven Analyses