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Engineering Economy, 8th edition
Leland Blank and Anthony Tarquin
Chapter 15
Cost Estimation and Indirect Cost Allocation
Understanding Cost Estimation
15.2 Rent: AOC Equipment cost: FC
15.3 The top-down (design-to-cost) strategy works best
15.4 Calculate taxes (A), make bids (E), pay bonuses (A), determine profit or loss (A),
15.7 (a) License plate (I)
15.8 Order-of magnitude estimates and they should be within ±20% of the actual cost.
Unit Costs
15.9 (a) Cost = 98.23(50,000) = $4,911,500
15.11 (a) Medium: Cost = 3,457,500/30,000 = $115.25 per ft2
15.13 (a) Crew cost per day = 8[26.70 + 29.30 + 5(24.45) + 33.95] = $1697.60
15.14 Cost in Hawaii = 1,350,000 (2.19/0.83) = $3,562,048
15.16 (a) CostA = 130,000(180) = $23,400,000
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Furnishings-other 97,500 25 2.4375 million
$26.0975 million
(b) % increase = (26,097,500 - 23,400,000)/ 23,400,000
= 0.115 (11.5% higher for B)
Cost Indexes
15.17 Cost = 185,000(245.9/210.0) = $216,626
15.18 Index in 2011 was 227.2
15.19 Table 15.3 index in 2010 was 217.0
15.20 (a) Time between 2009 and 2016 is 7 years
15.21 Let It = index value
15.22 PCI for 2010: 550.8/5.508 = 100
15.23 C2012 = 0.25(809.2 million)
15.24 Let i = decimal increase from 1926 to 2011, which is 85 years
15.25 At 2% per quarter, annual increase = (1 + 0.02)8 -1 = 0.1717 (17.17%)
15.26 Mechanical % in 2006: 2,511,893/13,136,431 = 0.1912 ( 19.12%)
15.27 (a) Cost10 = 85,000 (1+0.02)3 (1+0.05)7 = $126,924
15.28 (a) Use Equation [15.2] to predict prices with 2008 as the C0 ($35.82 for B-E and $44.60
= $82.50
Cost-capacity and Factor Methods
15.29 The cost index bases the estimate on cost differences over time for a specified value of
15.31 The value of the exponent will be 1.0
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0.7367 = 1.2218 x
x = 0.60
15.34 (a) 450,000 = 200,000(60,000/35,000)x
2.25 = 1.7143x
log 2.25 = x log 1.7143
x = 1.504
(b) Since x > 1.0, there is dis-economy of scale, so that the percentage increase in cost is
greater than the percentage increase in size, which is the opposite of most situations.
15.35 In $ million units,
15.36 (a) In $ million units,
(b) Spreadsheet image is below with Goal Seek template set with AOC = $1.5 million.
Answer is 12.4 MGD
(c) Spreadsheet image is below with Goal Seek template set with AOC = $1.0 million.
Answer is 12.4 MGD
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of McGraw-Hill Education.
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15.37 Use Equation [15.3] and Table 15-3
15.38 C2 in 1999 = 160,000 (1000/200)0.35
15.39 Find I2016 in Equation [15.4]
15.41 (a) h = 55.4/17.8 = 3.11
15.43 (a) h = 1 + 1.52 + 0.31 = 2.83
CT = [1,600,000(2.52)](1.31)
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= $5,281,920
15.44 Apply Equation [15.6]. Monetary units are in $ million
h = 1 + 0.2 + 0.5 + 0.25 = 1.95
Indirect Cost (IDC) Rates and Allocation
15.46 Total direct labor hours = 2000 + 8000 + 5000
15.47 (a) North: Miles basis; rate = 300,000/350,000 = $0.857 per mile
(b) Allocation:
15.48 Rate for CC100 = 25,000/800 = $31.25 per hour
15.49 (a) From Equation [15.8], estimated basis level = allocated IDC / IDC rate
Month Basis Level Basis_____
(b) The only way the rate could decrease is by switching the allocation basis from month
to month. If a single allocation basis had been used throughout, the rate would have
15.50 Determine AW for Make and Buy alternatives. Make has annual indirect costs.
Hand solution: Make: Indirect cost computation
Dept
Rate, $
(1)
Usage
(2)
Annual cost, $
(3) = (1)(2)
X
2.40
450,000
1,080,000
Y
0.50
850,000
425,000
Z
20.00
4500
90,000
$/year
1,595,000
AWmake = -3,000,000(A/P,12%,6) + 500,000(A/F,12%,6) – 1,500,000 – 1,595,000
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of McGraw-Hill Education.
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= -3,000,000(0.24323) + 500,000(0.12323) -3,095,000
= $-3,763,075
Spreadsheet solution: Select make alternative.
ABC Method of IDC Allocation
15.51 Determine the rates by basis, then distribute the $1,000,000
Example allocation for New York:
New build time: 793.65(425) = $337,301
Basis
Total usage
Rate
New build-time
1260 work-hours
793.65/work-hour
Allocation by each basis, $
Material cost
Previous build-time
New build-time
15.52 Total budget = 19 pumps × $20,000/pump = $380,000
(a) Total service trips = 190 + 55 + 38 + 104 = 387
Station ID Service Trips/year IDC Allocation, $____
(b) Station ID Number of pumps Allocation at $20,000/pump____
15.54 Total bags handled = 4,835,900
Bags handled
Allocation $
HUA
2,490,000
343,620
DFW
1,582,400
218,371
SAT
763,500
105,363
15.55 Compare last year’s allocation based on flight traffic with this year’s based on
15.56 (a) Rate = 1,000,000/16,500 guests = $60.61 per guest
Allocation = number of guests × rate
Site_______________
1 2 3 4____
(b) Guest-nights = (guests)(length of stay)
Site__________________
1 2 3 4___
(c) The actual indirect allocation to sites 3 and 4 ($60,610 vs. $134,757) are significantly
Additional Problems and FE Exam Review Questions
15.57 Percentage of total cost = 40/119 = 33.6%
15.60 C2 = 42,000(300/200)0.64
Answer is (c)
15.62 120,000 = 80,000(2)x
15.64 CT = 3.96(390,000)
