Economics- is a social science which consists of that body of knowledge dealing with people and their

assets or resources. Economics is total knowledge which treats of the creation and utilization of goods
and services for the satisfaction of human wants.

Engineering Economy – the study of economic problems with the concept of obtaining the maximum
benefit at the least cost.

Present Economy- involves the analysis of problems for manufacturing a product or rendering a
service based on present or immediate costs. Present economy studies usually occur when the effects
of time such as interest and depreciation are negligible.

Present economy studies occur in the following situations:

1. Selection of materials
2. Selection of method to be used
3. Selection of design
4. Selection of site location for a project
5. comparison of proficiency among workers
6. economy of tool and equipment maintenance
7. economy of number of workers

Example on selection of material:

A machine part to be produced may be made either from an aluminium or steel. There is an order for
8,000 units. Steel costs P 3.80 per kg, while aluminium costs P 8.70 per kg. If steel is used, the steel
per unit weighs 110 grams; for aluminium, 30 grams. When steel is used, 50 units can be produced per
hour; for aluminium, 80 units per hour with the aid of a tool costing P 640, which will be useless after
the 8,000 units are finished. The cost of machine and operator is P 10.80 per hour. If all other cost are
identical, determine which material will be more economical.

Solution: Determine the cost per piece:

STEEL ALUMINUM
Material Cost: 3.80/1000(110) = P 0.418 8.70/1000 (30) = P 0.261

Labor and machine: 10.80/50 = P 0.216 10.80/80 = P 0.135

Tool: ----------- P 640/8,000 = P 0.080

Cost per piece: P 0.634 P 0.476

Cost of 8,000 units: P 5,072 P 3,808

Conclusion: Aluminum is cheaper. (answer)

Example on selection of material:

 A diesel engine uses type Type A filter and high grade lubricating oil costing P 5.50 per liter. With
this filter, the oil and the filter have to be changed every 500 hours of operation, and 5 liters of oil have
to be added every 100 hours. This filter costs P148 per piece. Eighty liters of oil fill the engine.
Another type, filter B, costing P 120 may be used with a lower grade of oil costing P 4.80 per liter.
However, if this filter is used, the oil and filter have to be changed every 300 hours, and 10 liters are
added after each 150 hours the engine is used. Which type of filter and oil would you recommend?

Solution:

Type A Filter: (Consider 500 hours of operation)

Cost of filter: P 148

Initial Cost of Oil: 80 liters ( P 5.50) = P 440
Cost of additional oil every 100 hours (4 times between filter changes) = 4 (5 liters) (P 5.50) = P 110
Total cost for 500 hours operation: P 698
Cost per 100 hours operation = P 698/5 = P 139.60

Type B Filter: (Consider 300 hours of operation)

Cost of Filter: P 120

Initial Cost of oil : 80 liters ( P 4.80) = P 384
Cost of additional oil every 150 hours (once between filter changes) = 10 ( P 4.80) = P 48
Total cost for 300 hours operation : P 552
Cost per 100 hours operation: P 552/3 = P 184

Conclusion: type A filter is more economical , should be recommended (answer)

Problem:

A certain manufacturing company received an order for producing 100,000 pieces of a certain
machine part. A jig is necessary for production and two designs are presented whose properties are as
follows.
JIG A JIG B
Estimated life: 100,000 pcs 100,000 pcs
First Cost: P 5,000 P 4,200
Hourly wage of operator P 30 P 25
Number of pieces produced /hr 100 80

If the only consideration is economy of operation, determine which jig should be used.

Solution:
JIG A:
Number of hours to finish work = 100,000/100 = 1,000 hours
Total wage of operator = 1,000 ( 30.00) = P 30,000
Cost of Jig A = P 5,000
Total cost of Jig A = P 35,000
 Jig B:
Number of hours to finish work = 100,000/80 = 1,250 hours
Total wage of operator = 1,250 ( P 25.00) = P 31,250
Cost of Jig B = P 4,200
Total Cost of Jig B = P 35,450

Jig A is cheaper by P 450, jig A should be used.

Problem 1:

A manufacturer has a contract to produce 5,000 units of a certain device. The device can be made by
highly trained workmen working individually. The device can also be made by less skilled workmen
working together if they are given specialized equipment and proper supervision. The highly trained
workmen are paid P 20 per hour , and each can produce one unit every rwo hours on the averagr.
The specialized equipment can be placed in operation at an original cost of P 60,000 and it will be
worthless at the time the 5,000 units are manufactured. With this equipment four men, paid P 15 each
per hour, and a foreman, paid P 25.00 per hour, can do the work. All the five men working together can
finish one unit in 15 minutes.
Determine the gain or loss if the specialized equipment is used.

Solution:
Determine the total cost of each alternative.

Highly trained workmen:

Labor cost = 5,000 ( 2 ) ( P 20 ) = P 200,000

Less skilled workmen + equipment:

Time to manufacture 5,000 units = 5,000 ( 15/60) = 1,250 hours
Labor cost = 1,250 ( 4 x P 15 + P 25 ) = P 106,250
Equipment cost = P 60,000

Total Cost = P 166,250

Using the specialized equipment will result in a gain of P 33,750. Note also that it will reduce
manufacturing time from 10,000 hours to only 1,250 hours. ( answer)

Problem 2:

A construction company in Manila will bid on the digging of an irrigation canal in a nearby province
which measures 2 meters wide, I meter deep, 2 km long. Twenty laborers wil be employed at P 120
each per day, and they can dig, on the average, ½ cubic meter per hour. In addition, 2 foreman will also
be employed at P 250 each per day.
 A ditch digging machine may be rented at a cost of P 750 a day, in actual use and in transit to and
from from the construction site, In actual use, fuel and oil will cost P 280 a day. It takes one day, each
way, for transporting the machine. Freight charges for transporting the machine will be P 1,200 each
day. The machine operator accompanies the machine and is paid P 280 each day. The services of two
laborers would also be needed, in addition to the services of the machine. The machine can dig 1 cubic
meter every 4 minutes.
Alloowing P 20,000 for profit and contingencies, determine the lowest bid price of the company.

Solution:
By manual labor:
Volume of excavation = 2 ( 1 ) ( 2,000) = 4,000 cubic m
Number of hours to excavate = 4,000 cu m/0.5 cu m per hour = 8,000 hours
This is equivalent to 1,000 days; with 20 laborers, the work can be finished in
50 days.
Wages: Foreman - 2 (50) ( P 250) = P 25,000
Laborers - 20 ( 50) ( P 120 ) = P 120,000
Total Cost = P 145,000

By machine:
Number of cubic meters = 4,000 cu m
Time to excavate = 4,000 cu m (4 min/60min per hour) = 266.7 hours = 34
days
Machine rental = ( 34 + 2 ) ( P 750 ) = P 27,000
Fuel cost = 34 ( P 280) = 9,520
Freight cost for machine = 2 ( P 1,200) = 2,400
Wage of operator = 36 ( P 280 ) = 10,080
Wage of two laborers = 2 (34)(P 120) = 8,160
Total cost by machine = = P 57,160

Digging by machine is cheaper, and the lowest bid price will be = P 57,160 + P 20,000 = P 77,160 (ans.)

Problem:
A company manufactures 1,000,000 units of a product yearly. A new design of the product will
reduce material cost by 12 %, but will increase processing cost by 2%. If material cost is P 1.20 per unit
and processing will cost P 0.40 per unit, how much can the company afford to pay for the preparation
of the new design and making changes in equipment?

Solution:
The maximum amount the company should spend should not exceed the savings they will make on
the new design.
Decrease in material cost = 1,000,000 (0.12) ( P 1.20) = P 144,000
Increase in processing cost = 1,000,000 ( 0.02) ( P 0.40) = 8,000
Net savings on new design ==========================P 136,000 Answer.
Problem:
A man decided to paint his house himself after office hours. He can paint 25 square meters per
hour on the average. It takes him 15 minutes to prepare his materials and 20 minutes to keep the
materials after painting. If there are 900 square meters to be painted, how long will it take him to paint
his house if he devotes 2.5 hours each day?

Solution:
Number of hours required = 900 sq m/25 sq. m. = 36 hours
Net time daily devoted to actual painting = 2.5 - (15 + 20)/60 = 1.92 hours
Number of days = 36/1.92 = 18.8, say 19 days (ANSWER)

Problem:
An executive receives an annual salary of P 300,000 and his secretary a salary of P 60,000 a year.
A certain task can be performed by the executive, working alone, in 4 hours. If he delegates the task to
his secretary it will require him 30 minutes to explain the work and another 45 minutes to check the
finished work. Due to unfamiliarity of the secretary to do the task it takes her an additional time of 6
hours after being instructed. Considering salary cost only, determine the cost of performing the task by
each method, if the secretary works 2,400 hours a year and the executive 3,000 hours a year.

Solution:
Salary per hour:
For the executive: P 300,000/3,000 = P 100 per hour
For the secretary: P 60,000/2,400 = P 25 per hour

Cost of performing the task:

By executive alone, 4 ( P 100) = P 400 (Answer)
By executive and secretary together, (30 + 45)/60 (P 100) + 6.5 ( P 25 ) =
= P 287.50 (Answer)
j

Problem:
Two workers, A and B, produce the same product on identical machines. A receives P 25 per hour
and he produces 100 units per hour. B is able to produce 120 units per hour. The machine rate or cost
of operation of the machines used by them is P 100 per hour.
a. Determine the cost per piece for worker A
b. Determine the hourly wage of worker B in order that his cost per piece will equal that of A.
 A certain masonry day requires 200,000 cubic meters of gravel for its construction. The contractor
found two possible sources for the gravel with the following data:
Source A Source B
Average distance, gravel pit to dam site 3 km. 1.2 km
Gravel cost/cubic meter of pit ----------- P 10
Purchase price of pit P 800,000 ---------
Road construction necessary P 450,000 None
Overburden to be removed at P 4.20/cubic meter ------------- 90,000 cubic m.
Hauling cost per cubic meter per km P 4 P 4

Which of the two sites will give lesser cost?

Solution:

Cost of 200,000 cubic meter of gravel, source A:

Purchase price of gravel pit = P 800,000
Road construction = 450,000
Hauling = 200,000 (3 km) ( P 4) = 2,400,000

Total Cost = P 3,650,000

Cost of 200,000 cubic meter of gravel, source B:

Cost of gravel at pit = 200,000 ( P 10) = P 2,000,000
Removal of overburden = 90,000 ( P 4.20)= 378,000
Hauling = 200,000 (1.2 km) ( P 4 ) = 960,000

Total Cost = P 3,338,000

Problem:
A contractor has a job which should be completed in 100 days. At present, he has 80 men on the
job and it is estimated that they will finish the work in 130 days. Of the 80 men, 50 are each paid P 120
a day; 25 at P P 180 a day; and 5 at P 250 a day. For each day beyond the original 100 days, the
contractor has to pay P 500 liquidated damages.
a) How many more men should the contractor add so that he can complete the work on time?
b) If of the additional men, 2 are paid P 180 a day, and the rest at P 120 a day, would the
contractor save money by employing more men and not paying the fine?