Assignment II:

1. A cell phone company has a fixed cost of $1,000,000 per month and a variable cost of $20 per
month per subscriber. The company charges $29.95 per month to its cell phone customers.
a) What is the breakeven point for this company?
b) The company currently has 95,000 subscribers and proposes to raise its monthly fees to
$39.95 to cover add-on features such as text messaging, song downloads, game playing,
and video watching. What is the new breakeven point if the variable cost increases to $25
per customer per month?
c) If 20,000 subscribers will drop their service because of the monthly fee increase in Part
(b), will the company sLll be profitable?
2. Explain why the subject of engineering economy is important to the pracLcing engineer.
3. Assume that your employer is a manufacturing firm that produces several different electronic
consumer products. What are five nonmonetary factors(aPributes) that may be important
when a significant change is considered in the design of the current bestselling product?
4. A special purpose NASA fuel cell requires an investment of $80,000 and has no MV at any
Lme. OperaLng expenses in year k are given by Ck = $10,000 + $6,000 (k-1). Obsolescence is
reflected in increased operaLng expenses and is equivalent to $ 4,000 per year – this expense
has not been included in the equaLon for Ck.
a) Determine the economic life of the fuel if i = 0%.
b) Repeat part (a) when the $4,000 per year is ignored.
What can you conclude about the influence of an expense that is constant over Lme on
the economic life?

5. While studying for the engineering economy final exam, you and two friends find yourselves
craving a fresh pizza. You can’t spare the Lme to pick up the pizza and must have it delivered.
“Pick-Up-SLcks” offers a 1-1/4-inch-thick (including toppings), 20-inch square pizza with your
choice of two toppings for $15 plus 5% sales tax and a $1.50 delivery charge (no sales tax on
delivery charge), “Fred’s” offers the round deep-dish sasquatch, which is 20 inches in
diameter. It is 1-3/4 inches thick, includes two toppings, costs $17.25 plus 5% sales tax and
free delivery.
a) What is the problem in this situaLon? Please state it in an explicit manner.
b) SystemaLcally apply the seven principles of engineering economy (pp. 3-6) to the problem
you have defined in part (a).
c) Assuming that your common unit of measure is dollars (i.e., cost), what is the bePer value
for gekng a pizza based on the criterion of minimizing cost per unit of volume?
d) What other criteria might be used to select which pizza to purchase?
6. “What you do at work is your boss’ business” is a Lmely warning for all employees to heed.
Last year, your company installed a new computer surveillance program to improve office
producLvity. As a courtesy, all employees were informed of this change. The license for the
sonware costs $30,000 per year. Aner a year of use, producLvity has risen 10%, which
translates into a saving of $30,000. Discuss other factors, in addiLon to producLvity, that could
have been used to jusLfy the surveillance sonware.
7. A large, profitable commercial airline company files 737-type aircran, each with a maximum
seaLng capacity of 132 passengers. Company literature states that the economic breakeven
point with these aircran is 62 passengers.
a) Draw a conceptual graph to show total revenue and total costs that this company is
experiencing.
b) IdenLfy three types fixed costs that the airline should carefully examine to lower its
breakeven point. Explain your reasoning.
c) IdenLfy three types of variable costs that can possibly be reduced to lower the breakeven
point. Why did you select these cost items?

8) A large wood products company is negoLaLng a contract to sell plywood overseas. The fixed
cost that can be allocated to the producLon of plywood is $900,000 per month. The variable
cost per thousands board feet is $131.50. The price charged will be determined by p = $600-
(0.05)D per 1,000 board feet.
a) For this situaLon determine the opLmal monthly sales volume for this product and
calculate profit (or loss) at the opLmal volume.
b) what is domain of profitable demand during a month?
9) An electric power plant uses solid waste for fuel in the producLon of electricity. The cost Y in
dollars per hour to produce electricity is Y = 12+0.3X + 0.27X2, where X is in megawaPs.
Revenue in dollars per hour from the sale of electricity is 15X - 0.2X2. Find the value of X that
gives maximum profit.
10) Suppose you are going on a long trip to your grandmother’s home in SeaPle, 3,000 miles
away. You have decided to drive your old Ford out there, which gets approximately 18 miles
per gallon when cruising at 70 mph. Because grandma is an excellent cook and you can stay
and eat at her place as long as you want (for free), you want to get to SeaPle as economically
as possible. However, you are also worried about your fuel consumpLon rate at high speeds.
You also have cost of food, snacks, and lodging to balance against the cost of fuel.
What is the opLmum average speed you should use so as to minimize your total trip cost, CT?

CT = CG + CFSS,

Where CG = n x Pg x f (CG = cost of gas),

CFSS = n x Pfss x v -1
(CFSS= cost of food, snacks, and lodging),

n: trip length (miles)

Pg: gas price, $3.00/gallon,
Pfss: average hourly spending money, $5/hour,
(motel, breakfast, snacks, etc., $120 per 24 hours!),
v = average Ford velocity (mph),

f = k x v,

where k is a constant of proporLonality and f is the fuel consumpLon rate in gallons per mile.
11) In a building construcLon project, 7,500 feet of insulated ductwork is required. The ductwork
is made from 14-gauge steel cosLng $8.50 per pound. The 24 inch diameter duct weighs 15
pounds per foot. InsulaLon for the ductwork costs $10 per foot. Engineering design will cost
$16,000, and labor to install the ductwork will amount to $180,000. What is the total cost of
the installed ductwork for this project?
12) A machine is to be purchased at a cost of $1,000,000. The actual operaLng cost for first year
is $100,000 which increases $50,000 thereaner every year. The annual maintenance cost for
first year is $10,000 which increases $5,000 thereaner every year. The salvage value of the
equipment aner 1 year $500,000 and it decreases by $50,000 every year. If MARR is 15%,
find the economic life of the equipment.
13) A Project is being considered by the Tennessee Department of TransportaLon to replace an
aging bridge across the Cumberland River on a state highway. The exisLng two lane bridge is
expensive to maintain and creates a traffic boPleneck because the state highway is four lanes
wide on either side of the bridge. The new bridge can be constructed at a cost of $300,000,
and esLmated annual maintenance costs are $10,000. The exisLng bridge has annual
maintenance cost of $18,500. The annual benefits of the new four-lane bridge to motorists,
due to the removal of the traffic boPleneck, has been esLmated to be $25,000. Conduct the
B-C analysis, using MARR of 8% and a study period of 25 years, to determine whether the
new bridge should be constructed.
14) Three mutually exclusive alternaLve public-works projects are currently under consideraLon.
Their respecLve costs and benefits are included in the table that follows. Each of the projects
has a useful life of 50 years, and MARR is 10% per year. Which, if any, of these projects should
be selected?

A B C
Capital Investment $8,500,000 $10,000,000 $12,000,000
Annual OperaLng & 750,000 725,000 700,000
Investment Costs
Market value 1,250,000 1,750,000 2,000,000
Annual Benefit 2,150,000 2,265,000 2,500,000

15) A company produces and sells a consumer product and is able to control the demand for the
product by varying the selling price. The approximate relaLonship between price and
demand is

2,700 5,000
𝑝 = $38 + − , 𝑓𝑜𝑟 𝐷 > 1,
𝐷 𝐷!

where p is the price per unit in dollars and D is the demand per month. The company is
seeking to maximize its profit. The fixed cost is $1,000 per month and the variable cost (cv) is
$40 per unit.
a) What is the number of units that should be produced and sold each month to maximize
profit?
b) Show that your answer to Part (a) maximizes profit.

16) An electric power plant uses solid waste for fuel in the producLon of electricity. The cost Y in
dollars per hour to produce electricity is Y = 12 +0.3X + 0.27X2, where X is in megawaPs.
Revenue in dollars per hour from the sale of electricity is 15X - 0.2X2. Find the value of X that
gives maximum profit.

17) Write short notes:

a) What is the primary objecLve of Value Engineering in a project or product development
process?
b) DifferenLate between micro economics and macroeconomics.
c) Define oligopoly market and monopoly market.
d) What does Gross DomesLc Product (GDP) measure, and why is it considered an important
indicator of a country's economic performance?