Process/steps in solving problems

1. formulate the problem

2. analyze the problem
3. search for alternative solution
4. select the preferred solution
5. specify the preferred solution
Factors affecting the process of decision-making
1. monetary consideration (tangible factors)
2. non-monetary consideration (intangible factors /irreducibles
a. ethical and social values
b. consumer’s likes and dislikes
c. environmental impact
d. government regulations
Fundamental ideas about study of decision
a. decision – conceptualization of a choice situation, whether in the form of a mental image or an explicit model.
b. decision-making – simplification of reality
General steps in decision-making
1. recognize and formulate the problem
2. search for feasible alternatives
3. Analyze the feasible alternatives
4. select the preferred alternative
Procedure in Engineering economy analysis (step)
1. recognize, formulate, and evaluate the problem
2. develop the feasible alternatives
3. develop the net cash flow for each alternative
4. select a criterion (or criteria)
5. analyze and compare the alternatives
6. select the preferred alternative
7. monitor performance and post evaluation results
Engineering Design process (activity)
1. define the problem/need
2. formulate and evaluate the problem/need
3. synthesize possible solutions (alternatives)
4. analyze, optimize and evaluate alternatives
5. specify the preferred alternative
6. communication
Cash flow – money is transferred from one organization or individual to another.

Life-cycle cost – sum of all expenditures associated with the item during its entire service life. It may include:
1. engineering design and development
2. fabrication and testing cost
3. operating and maintenance cost
4. disposal cost
– summation of acquisition, operation, maintenance and disposal cost. Therefore it consists of:
1. first cost (or initial investment)
2. operating and maintenance cost
3. disposal cost
First cost – total initial investment required to acquire and prepare the item for service. It may consist of the ff
Major elements:
1. basic cost of the training
2. cost for personnel training
3. shipping and installation cost (foundation and vibration/noise insulation, light, heat and power)
4. initial tooling costs
5. Supporting equipment cost (such as computer hardware and software)
Operation and maintenance cost – recurring cost that are necessary to operate and maintain an item during its
useful life. Operating cost usually consist of labor, material and overhead cost. Overhead items typically include fuel,
electric power, insurance premiums, inventory charges, indirect labor, administrative and management expenses.
Disposal cost – results when the life cycle of an item has ended. It may include labor and material cosr for removal of
the item, shipping cost, or special cost (cost of disposing hazardous materials)
Salvage cost – market or trade-in value minus the cost of disposal
Market/trade-in value – monetary value of an item at the end of its life cycle or the actual worth for which the item
may be sold at the time of disposal.
Book value – value of a capital asset at the end of given accounting period. It is an estimate of market value.
Scrap value – value of material itself of which the item is made
Sunk cost – past costs that are unrecoverable (capital loss)
Past cost – historical cost that have occurred for the item under consideration.
Future cost – cost that may occur in the future (rarely known with certainty)
Opportunity cost – cost of foregoing the opportunity
Direct material and labor cost – easily measured and can be conveniently allocated to a specific operation, product or
project.
Indirect cost – difficult or impossible to assign directly to a specific operation, product or project.
Overhead cost – cost of manufacturing other than direct material and direct labor
Fixed cost – do not vary in proportion to the quantity of output
Ex. General administrative expense, taxes and insurance, rent, building and equipment depreciation
Variable cost – vary in proportion to the quantity of output (usually direct material and labor)
Average cost – ratio of total cost and the quantity of output.
Marginal cost – derivative of total cost
Two basic financial reports:
 balance sheet/statement of financial condition
1. assets – properties owned by a company
2. liabilities – debts owed by firms against the assets
3. net worth – difference between assets and liabilities. Another term is owner’s equity.
 Profit and loss statement/income statement – revenues and expenses incurred by the firm
Current Assets – cash and other assets that can be readily converted into cash in one year.
Ex. Cash, accounts receivable, notes receivable, raw material inventory, works in the process, finished good inventory,
small tool inventory and pre-paid expenses
Current Liabilities – debts that are due and payable within one year from the date of balance sheet
Ex. Accounts payable, notes payable, interest, taxes, prepaid income and dividends payable
Fixed assets – properties own by firm that are not readily converted into cash in one-year period
Ex. Land, building/s(less depreciation), equipment(less depreciation) and furniture and fixtures
Fixed Liabilities – long-term debt due and payable after one year from the date of balance sheet.
Ex. Notes payable, bonds payable, mortgages payable and equipment load payable.
Cost allocation – prorating overhead cost to a specific job. Common methods of prorating overhead cost:
a. overhead cost rate per direct labor hour
b. overhead cost rate per percentage of direct labor cost
c. overhead cost rate per percentage of prime cost (direct material plus direct labor cost)
Break-even analysis – is conducted to determine the value of parameter in order to be equal.
Break-even – a situation wherein a business has neither profit or loss.
How to lower the break-even value:
1. increase the slope of the total sales line
2. decrease the slope of the variable cost line
3. decrease the magnitude of the fixed cost line
Inflation – increase in the price of goods and services from a year to another