Engineering Economy 16th Edition By Sullivan - Test Bank

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

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Answer the question. 1) A manufacturer of hard board and fiber cement sidings and panels purchased new equipment for its new product line. Three alternatives are under consideration. The costs associated with each alternative are given below. Which alternative is most economical to minimize total life cycle costs, if the life of the equipment is estimated to be 7 years and the

company operates on average 3800 hours per year? Assume negligible salvage value.

Answer: A: Total life cycle costs = $6,456,900.00

B: Total life cycle costs = $6,321,500.00

C: Total life cycle costs = $6,538,400.00

To minimize life cycle costs, select Alternative B. Explanation: Total life cycle costs = Investment cost + Fixed costs over 7 years + Variable costs

over 7 years

A: Total life cycle costs = $40,000 + $(4700)(7) + $(240)(3800)(7) = $6,456,900.00

B: Total life cycle costs = $39,000 + $(4500)(7) + $(235)(3800)(7) = $6,321,500.00

C: Total life cycle costs = $41,000 + $(4800)(7) + $(243)(3800)(7) = $6,538,400.00

C: Total life cycle costs = $41,000 + $(4800)(7) + $(243)(3800)(7) = $6,538,400.00

To minimize life cycle costs, select Alternative B.

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2) The annual fixed cost for an inspecting and profiling web controller manufacturing company are $44,000, and the variable costs are $38 per unit. If the selling price per unit is

p = 495 - 0.57X, what is the company's range of profitable demand?

Answer: The range of profitable demand is 112 to 689 units per year.

D* = a - CV

2b = 495 - 38

2(0.57) = 401 units per year

Profit (loss) = Total Revenue - Total Cost

= 495D - 0.57D2 - (44,000 + 38D)

= 495(401) - 0.57(401)2 - 44,000 - 38(401)

Explanation: p = 495 - 0.57D; CF = $44,000 per year; CV = $38 per unit

= $47,600.43 per year

Breakeven occurs when profit = 0.

Profit = 0 = -0.57D2 + 457D - 44,000 = D2 - 801.75D + 77,192.98

D = 801.75 ± (801.75)2 - 4(77,192.98)

2

D 1 = 112 units per year

D 2 = 689 units per year

The range of profitable demand is 112 to 689 units per year.

3) The annual fixed cost for a light fixture manufacturing company are $38,000, and the

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variable costs are $40 per unit. If the selling price per unit is p = 485 - 1.395X, what is the

optimum demand for a light fixture?

Answer: 159.50 units per year

Explanation: p = 485 - 1.395D; CF = $38,000 per year; CV = $40 per unit

D* = a - CV

2b = 485 - 40

2(1.395) = 159.50 units per year

4) An accounting and management consulting firm charge-out rate is $112 per hour. The

maximum output is 214,000 hours per year. The fixed cost is $610,000 per year and the

variable cost is $62 per standard service hour. What is the breakeven point in percentage

of total capacity?

Answer: 5.70% of capacity

Total revenue = Total cost (breakeven point)

pD = CF + CVD

Explanation: CF = $610,000/yr; CV = $62/hr

D = CF

p - CV = $610,000

($112 - $62) = 12,200

D (% of capacity) = $12,200 214,000 = 0.057 or 5.70% of capacity

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25) A night vision goggle manufacturer is evaluating a make-versus-purchase situation for a

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component used in its low-priced products. The component can be purchased at a

variable wholesale price of P = 1200 + 50X, where X is the number of items. Alternatively, the component can be produced with a direct material cost of $17 per item and direct labor

cost of $38 per item. The manufacturing overhead is allocated at 150% of direct labor cost per item. If the company requires, on average, 575 items each year, should the item be

purchased or manufactured?

Answer: Purchase: $29,950.00

Manufacture: $64,400.00

Select the option that has the least total cost purchasing the item.

Explanation: Purchase: CT = 1200 + 50(575) = $29,950.00

Manufacture: CT = $(17 + 38 + 57)(575) = $64,400.00

Select option that has the least total cost purchasing the item.

6) You are deciding between three types of water heaters. The associated costs are shown below. The annual cost of operation for gas and oil heaters is estimated by 365 x 41045/EF x Fuel Cost per Btu, and the annual cost of operation for electric water heaters is estimated by 365 x 12.03/EF x Electricity Cost per kWh. 6)

The selected heater will be used for only one year and then sold at the market value. Which alternative should be selected?

Answer: Total cost of electric heater = $6019.55

Total cost of gas heater = $4762.83

Total cost of oil heater = $5199.75

Select the heater that provides the least annual costs the gas heater.

Alternative Electric Gas Oil

Price of water heater $28,000 $23,000 $25,000

EF 2.0 0.57 0.75

Fuel cost $0.1/kWh $0.00001/Btu $0.00001/Btu

Annual maintenance costs $3000 $2200 $2500

Market value $25,200 $20,700 $22,500