Chapter 1 O

Economic Factors Influecing

Design

in this chapter, we shall diseuss a number of topics not directly related to the function of product
a
but, nevertheless, are important to the success of the product. The cost of the product is one such
factor, in comparing alternative designs.
First, we shall introduce some basic notions of value engineering, which deal with the
relationship between performance and cost. A product may have undesirable cffects, such as
accidents, failures and environmental damage, the absence of which increases the value of the
product indirectly. We shall study the safety and reliability requirements of a product and their
relationship. In the end, break-even analysis, which is an important, tool of economics is discussed,
alongwith break-even chart and profit-volume chart.
The main objective of this chapter is to show how product design is influenced by various
economic factors. Technology and engineering represent alternatives only, which can be used, if
required. What is actually done is governed by economic factors.

10.1 PRODUCT VALUE

Value Engineering (VE) is a very important subject and is dealt with, in detail, in Chapter 12. In this
section, we introduce the notion of value. For instance, if smal pastries sell for 70, per dozen and
large pastries sell for 85, per dozen, which kind of pastry has a better value? We must reduce the
pastries to a common base, in order to compare them rationally. Suppose that each large pastry
weighs 2 o2 and each small pastry weighs 1.7 oz, then the value of smnll party is 0.291 oz. Thus,
the small pastry has a better value!
In the design of a typing machine, for example, the following options are available: clectric type,
manual, and tabulator, Let the speed be chosen to quantify performance. Hypothetical costs and
values are shown in Table 10.1. The basic manual typewriter has a value of 1.5 word/min per rupee.
Those options with a value greater than I are more desirable than the basic version. Those options

Table 10.1 Analyzing values of typewriter options

Speed Cost, Value

(word/min) (x 00) (word/min/R
Electric 50 50
Manual additional 30 20 1.5
Tabulator additional 2 2.5

264
 ECONOMIC FACTORS INFLUENCING DESIGN 265
with a value less than l cannot.be justified, on the basis of typing
speed only. As the table shows,
the tabulator has the best value. Of course, 'a broader view
of performance includes low noise,
tidiness of type and appearance, convenience of the typewriter,
and other intangible aspects of value.
Functional requirements. It is true that, in order to do
exactly what is needed without wasting
effort, one must be able to state one's objective clearly
and precisely. The definition of a function
in value engineering and product design is rather unusual.
Value and performance are sought from
an abstract and conceptual approach, without
implying any particular mathematical model or
physical quantity. As an example, let us examine
the bicycle tail light. Its function may be described
in a primitive need statement as: improve
safety, draw attention, or illuminate bicycle. The three
descriptions tend towards increasing the safety
of a bicycle, but they involve different degrees of
attraction. "Iluminate bicycle" is the most
exact description, but it implies the use of light bulbs and
limits the scope of the solution. "Drawing attention"
may allow the use of sound, motion, glare, flag8S,
reflectors, bright paint, etc. "Improve safety"
may suggest the construction of special bicycle paths
or the use of helmets or bumpers. If an engineer
is brought into the design of a tail light, he might
reduce cost, by using cheaper materials and easier
manufacturing methods. Optimization may lead
to a better lens angle and, hence visibility.
The abstract analysis of a function can bring out totaly
different ideas. For this reason, function definition
in value engineering can be considered as a
technique to identify the problem. Most other engineering
methods are problem-solving methods, in
which the problems are intuitively assumed. In value-engineering,
emphasis is laid on analyzing the.
function, and not on the hardware that performs the
function.i
Many products have a variety of functions. There is usually
a principal function and a host of
secondary functions. To define a function means
to find out what the consumer wants the product
to do. In this sense, value analysis is related to marketing
research. Consumer testing and ratings
have been used regarding the taste of different drinks and riding
comfort of automobiles. K
After a function is defined or measured, the value is obtained by dividing
the function by the
cost. At this time, the engineer should seriously consider all the alternatives
that could perform the
function. There are several questions that may help:
1. How does the product meet the function?
2. Which features of the product do not contribute to the
3. What else can do the job?
function?iutogsd iimoq
sr4. Can an additional component or a change in material improve the
performance?is
5f3 191uefitT
10.2 DEsIGN FOR SAFETY, RELIABILITY AND ENVIRONMENTAL CONSIDERATIONS
Safety, reliability and ecology are important considerations in design. These factors add extra
cost
to the product, or the production process, and they put an additional burden on the designer. Safe,
reliable and ecologically sound products will enrich society and win acceptance in the long run.
iSafety is a very important consideration in product design. Whether the people paying for the
accidents are the consumers, the distributors, the manufacturers or. the insurance companies, it is the
consumer who suffers. An unreliable machine may result in the termination of service or it may
Tesult in an accident. A machine that has a short useful life is uneconomical. Therefore, reliability
is also good economics.
Product design, from the point of view of environment, is vital. Pollution of air, water and soil
are a means of saving money by abusing and exploiting the environment. A polluted environment
is a source of discomfort and is harmful to human beings and animals. Yet, zero pollution
is too
266 PRODUCT. OESIGN AND MANUFACTURING

the cost or ail the pollution

neavy a burden for most industries. If the cost of a product has to include
common man. do, we nave to tolerate
cOntrol, probably the price would be beyond the reach of the
to the environment, for our short-term well being. Consiaer automobiles as an
damage ge. Some
With pollution control devices, they have a higher initial cost ana
anpie
cars even suffer in performance and reliability.

10.2.1 Design for Safety y

supplies to the consumer, tne Iormer also
is
BCSIdes the explicit warranty which a manufacturer an accident during
user suffers from
Committed to an implied guarantee of safety to the user. If the
from the manutacturer. There are
ne normal usage of a product, he would expect compensation
many conditional safety standards for products:

vzbt . As safe as they can possibly be 27i13

t 2. Safe, according to industry-wide standards
in the instructions
3. Safe, if used in the manner and situations specified
4. Safe for a child who may behave impulsively
legal aspects of safety. Often, decisions in court
tEngineers and designers are concerned about the Moreover, the enforcement of laws and the
involve judgments, not obvious to the designer.
and may change with public
interpretation of constitutional rights vary from one country to another,
countries,
awareness. The information given here presents a general outline for designers. In most
USA from agencies such as
specific details are available from government agencies, for instance, in
the National Highway Traffic Safety Administration (NHTSA), Food and
Drug Administration
(FDA), Consumer Product Safety Commission (CPSC), and the Occupational
Safety and Health
Administration (OSHA), under the Department of Labour.
and particular
Reducing the responsibility of the manufacturer, by specifying narrow situations
not following the
procedures does not always work. In court, the user is often not responsible, for
minute details included in the instructions. It all depends on how reasonable and obvious
the
error as
instructions are. Products are required to function in real-life situations, allowing for human
permitted by ergonomic factors. Real-life conditions may include power failure, poor maintenance,
accidental overheating, and a corrosive environment. Human errors include slight ignorance,
negligence and abuse. Though instructions do not exclude responsibility on the part of the
manufacturer, clear and explicit warnings are often the best defence. Whenever possible, safety
warnings should be placed on the product. Crucial wamings are sometimes included as part of
-
advertising8
Quality assurance is aimed at removing faulty designs, miscalculations and inherent defects. The
decision by quality assurance often necessitates design and drawing changes. Quality control curbs
manufacturing defects and variations in quality such as assembly defect. The methods of quality
control include visual inspection, non-destructive testing, and random sampling. Date coding, batcn
coding and serial numbering are widely used in high-volume consumer products. In case a detect l
noticed after the product leaves the company, the date and batch codes will enable traceability

10.2.2 Mistake Proofing

nal
A defect-free or fail-safe design is one that will not lead to accidents, in the case of functiona
failures. Since a functional repair is much cheaper than a damage from an accident, fail-safe designs
 ECONOMIC FACTORS
INFLUENCING DESIGN 267
are recognized as superior and necessary in many products. Take
systems are designed so that the power steering as an example. Most
power steering wheels can still
fluid pump fails or the be controlled without the power
ster. If the engine stalls, the car,can
roe soft drink bottles have foam plastic coatings stillbe.steered.tsietiyA).eioe
st
for increased safety. Uncoated bottles are
to explode upon impact, under the pressure,
known of carbon dioxide.
nlastic coatings, to prevent shattering due to sudden heating. Photographic Automobile
flash bulbs also
windshields are
engineered to prevent shattering.
c The clothing or hair of an
employee may be caught between rollers
and dragged into a machine.
Slip clutches, shear pins, fuses, circuit breakers and
pressure-relief valves are used to prevent
rloads. If a bicycle 1s jammed under an electric garage door (or an elevator
door), a slip clutch
can nrevent uncontrolled large forces that might damage both the bicycle and the garage
Interlocks are used to prevent human errors. For door.
instance, the keys for a car with an automatic
transmission cannot be removed unless the shift is
in 'park' position. In some cars with manual
transmissions, the engine cannot be started unless
the clütch is depressed. Safety switches are
installed at the bottom of some portable heating appliances.
If an appliance, ch as an electric room
heater, is accidentally tipped over, it would automatically shut off. All
of these are introduced
because humans do not function perfectly, and the design parameters invariably take into account
the
human erTors.
in9 Emergency equipment in buildings has greatly improved,
during the last decade, due to fire
hazards. Many buildings are equipped with emergency exits,
emergency lights, which have self-
contained battery packs, fire doors, smoke detectors and automatic sprinkling
systems. Emergency
elevators are also installed in some tall buildings.

10.2.3 Factor of Safety and Reliability x- ) = (-

Factor of safety is the ratio of strength to load. Strength is a characteristic of the mauhine component:
the maximum force can bear. The load is the actual force imparted to the component, when the
it
machine operates. The strength of a component may vary, because of uncertainties in material
properties and finishing processes. The load may exceed the estimated load, when the machine is
missed. A factor of safety larger than 1 leaves a margin for an overload, and for the discrepancy
between what is calculated and what actually happens. Sometimes, a factor of safety as large as 10
1s used, because
the estimation of strength and load is extremely inaccurate. Since excess strength
Tesults in material wastage, a better engineering practice is to obtain an accurate evaluation of the
strength and the load, and to use a small factor of safety.
Reliability is a statistical estimate of the probability of success. Such, an evaluation includes the
Statistical distribution of strength and load. The concept of product reliability is largely associated
With warranty and liability. A good practice is to make the product 99.9% reliable, and to replace
the one out of 1000, which is defective. The probability of failure is the complement of reliability:
(F=1 -R).
Reliability is a statistical evaluation to the real situation. The factor of safety is a simple ratio
to aid design. A product with a safety factor of 1, 5, 2 or 4 presumably will not fail.
For components in series, the one with the smallest factor of safety determines the overal safety
actor. As the load increases, the weakest component always fails first, thus, the weakest component
CS ike a fuse to protect the stronger components. Therefore, the safety factor of the system equals
thie smallest
safety factor of the components. Reliability is a random occurrence, where the cause of
14lure may not be the load. The reliability R of components in series is the product of all component
reliabilities:
268 PRODUCT DESIGN AND MANUFACTURING

it 2419494 at(10.1)
R, R, Ra R RsRy
i,
wnere
n
, *11as siuinR
R2, Rz, .. are the reliabilities of the components and
series, Occasionally, a more dependable
n is the total number of
component will fail, before a less dependable
components
component
overall reliability. Figure 10.1 illustrates
ne addition of more components in series will decrease the 9btths a
ne safety and reliability factor of a series svsten,
Overall safety FAZ
S15 S12 -13 2 1factor, SF = 1.3

Overall reliability
R= 0.6 R= (0.9)(0.7) (0.85)(0.6)
R09 R=0.7 R= 0.85
Safety factor and reliability. 1 tgft
= 0.3213

,22et12
g Fig. 10.1

parallel is rather different. A parallel system

The evaluation of the reliability of components in
probability of system failure F is the product
will fail only if all the redundant components fail. The
the complement of the chance of
or the individual component's probability of failure. Reliability is
90%. Suppose we have a system
failure. A system with 10% probability of failure has a reliability of
of n components in parallel. Let F; and R; be the probability
of failure and the reliability of the
and reliability of the system.
component, respectively. Also, let F and R be the probability of failure
Then
F =1 -R
R= (1 - F) = (1 -
Fx F2 x F3 XX a) 2 1o 7etos .0r
R 1 -
[( -
R,) (1 - R) (1 - R3)(1 - Ra) (- R)) vst o (1002)
To illustrate the dramatic difference in the overall reliabilities of a series system and a parallel
system (see Fig. 10.2), let us connect four components of R1 = 0.8 in two different ways: 89

R= 0.8
H R=0.8 R=0.8
(a) Series
R=0.8 -R=(0.8)"= 41%

R 0.8
1dteto inatai
1 R 0.8

-R = 1 - (1 -0.8)' = 99.84% del

R 0.8

R=0.8
(b) Parallel
Fig. 10.2 Series and parallel configurations in reliability.
idsilo
 ECONOMIC FACTORS INFLUENCING DESIGN 269

If connected in series, the overall reliability isuld

1.
=
ot old
R R" = (0.8' 0,41
2.If connected in parallel, the overall rcliabilityis
-R
R 1
-(1 = 1
-
(0.2 =0.998.

10.2.4 Design for Reliability

he Safety factor and reliability can be converted from one to another, if statistical data are available
The
the strength.
about the load and
A tensile bar with a mean strength 4, would have a frequency distribution as shown in Fig. 10.3.
T the load is very precise, the probability of failure is represented by the area to the left of the load
ine. The difference between the strength and the
load, which is the safety margin
.)
strength,
failure. If x is very large, the load line would be at the extreme left
,
can be expressed as x times the standard deviation of the strength, o,, as illustrated in
Fig. 10.4(a). Ifx = 0, the load line coincides with the mean and there would be 50%
of the strength distribution. Thus,
the failure rate would be very small. Table 10.2 shows x vs. reliability. This relationship being a
characteristic of the assumed normal distribution, the safely factor can be related to x and o/, (the
ratio of standard deviation of strength to mean strength) by the following equation:
strengu
Safety factor SF = = (4J4) (10.3)
load 1-x(0,)
Frequency
distribution Strength
a).
Load Reliability
/ R=P (strength> load)
Probability
of failure
F=p(load)
strength)

s Statistical
variable z
Safety margin x o,
Fig. 10.3 Reliability based design.

Using the value of 0.08 for (0,/u), in Eq. (10.3), the values of reliability and corresponding SF
be a wider safety
values are tabulated. In actual machines the load may vary, and there should
margin. The combined effect of load and strength distributions is shown in Fig. 10.4(b).
The conversion from reliability to safety factor depends on the following factors:
it 11
z= interference variable
o, standard deviation of strength
O = standard deviation of load
= mean strength
HL mean load
270 PRODUCT DESIGN AND MANUFACTURING

and safety 1actorstm. 1

Table 10.2 Tabulation of reliabilities
static loading (deterministic)
for

R= Pz> H) (based on o/, = 0.08)

(per cent))
50
80 0.84

95 1.645

yt ), u n099,9 d bstoesip1 3.08 totd 9 n1.327 rt tat y

a3 142 1
9) 99.99 ol ri t3.7T9

Distribution of
dg t
,
H the interference PL
variable z i.f Reliability
12
R= P(Z> 0) 13931le ib,
Probability
of failure
F=P(Z<0)

Interferenceiurliei
variable z
X
a)

Probability
of failure

Frequency Strength
distribution
Load

A Pounds
Safety margin =
(4, -HD of force 9tuidi sp
(6)
Fig. 10.4 Interference (shaded area) between strength and load in reliability based design.

bsol ei
 ECONOMIC FACTORS INFLUENCING DESIGN 271

Civen (Ou,) and (oi/4), the following formula (given the

safety factor) can be derived:

SF =
1-xy(o,/4,)+(G/4,)
Since, in practice, varniation in material property is most frequent and loadingis static, Eq. (10.4)
ces to Eq. (10.3), and hence the calculation in Table 10.2 is based on Eq. (10.3).

403 MANUFACTURING OPERATIONS IN

RELATION TO DESIGN
oure 10.5 shows the price structure of a modern manufacturing company.
Figur
h i haviar
The selling price can be
lecided
ded on the basis of indirect cost, direct cost, tax, and profit. The direct cost includes the costs
of material, labour and equipment. As a means to simplify cost estimation, normal ratios are
established between the material cost, the direct cost and the
selling price. A typical ratio is
Material cost:Direct cost Selling price =
1:3:9
Selling price

Indirect costs Direct costs

Administration costs Power
Sales cost and commission Material
Labour
Advertisements costs
Equipment
Rent and utilities Packaging
Insurance Machine maintenance
Employee's benefits
Research and development (R&D)
Warranty profit
Patent and royalty
Interest (paid on borrOwed capital) t iitt.ufu tu

uftndrr Fig. 10.5 The price structure of a modern manufacturing company.

od In this case a product, whose raw material costs are Rs 10 and manufacturing costs Rs 30, should
have a selling price of Rs 90 in order to make a reasonable profit.
This nominal cost formula works well, as long as we have a narrow group of similar products.
Using the above ratios, plastic products that cost about Rs 60/kg in terms of raw material would
have a selling price of Rs 540, Because of this cascading effect, a 10 per cent saving in the
material cost could lead to 90% reduction in the selling price. The nominal ratio may be quite
different for a completely different industry. The food packaging industry may have a ratio of
2:5. The ratio between the selling price and the direct cost is sometimes called the operational
Overhead ratio. This ratio describes the efficiency and the risks involved during the operation.
Typically, for companies specialized in advanced technology or speculative products, the operational
overhead ratios are high.
Since we are mostly interested in the design of a product, we will concentrate on the direct cost
of a product.

le Direct cost = material + power + labour + equipment. T; (10.5)#il

272 PRODUCT DESIGN AND MANUFACTUAING

to the production
Usually, the costs of material, power and labour are directly proportional
voume. The equipment cost is independent of the production volume. 1he cost component which
1s proportional to the production volume is a variable cost.

Total cost = variable cost x quantity +

fixed cost (10.6)

fixed cost t tE
Unit cost = variable cost + quantity irl o(10.7)

Equations (10.6) and (10.7) are illustrated in Fig. 10.6. A mathematical model for break-ever
ven
analysis is discussed in detail in Section 10.6.

Total
cost i e
Fixed VariableBlM
cost
cOst

Variable cost Unit cost

Quantityb
Fig. 10.6 Graph showing cost of production vs. quantity.
yolqt
The distinction between the fixed and the variable costs is critical in the profit-volume
relationship. Sometimes it is difficult to distinguish between variable and fixed costs. Take labour,
for example. If workers can be hired and laid off from day-to-day to match the production need, the
labour cost would be a variable cost. If recruiting efforts or labour unions prevent the change
of
personnel, with the fluctuation of production need, the labour cost would be a fixed cost. Some cost
accountants prefer to use accounting data from the history of the company, to determine whether the
cost of one constituent varies with the company's sales.
A question that frequently arises is, whether a company should purchase
components or make
them in-house. Figure 10.7 shows a simplified model, which assumes that the unit purchase
price is
constant (independent of quantity). There is a break-even quantity, at which a
manufactured item is
comparable in cost to purchased item. For quantities larger than the break-even
quantity, it is more
economical to manufacture the parts and vice versa. If the unit
purchase price decreases with
quantity, the break-even point will be at a larger quantity, causing the
break-even point in Fig. 10.7
to be shifted to the right. The question of make or buy should consider
some other factors too. There
is more control over the quality of a component, if it is
manufactured in-house. There is less
shipping, receiving and inspecting. The company would also be building
up its strength, instead of
possibly helping a potential competitor. On the other hand, a company
cannot just get into a new
business and expect to make money. It might be better to stay in one's
speciality and leave unrelated
jobs to others. Purchased items are cheaper for small quantities, because there is
no capital tied up.
Purchasing parts from outside also has the advantage of flexibility.
Assume that a component of a
car is purchased. The drop in sales of one motor company and an increase
in the sales of another
 ECONOMIC FACTORS INFLUENCING DESIGN 273
RTE 3Cost|
Purchase cost
T ait102i lE R
of sales revenue
AP
Manufacturing
Cost

i falts btu
P= slope ofline OR-92 4 gR ÅsYS 283
V slope of line FG

o
1
Quantity X i
Fig. 10.7 Break-even chart.
would not influence this component supplier, as long
as the total automobile market is constant. The
component supplier can make the part cheaper than
an individual motor company because of a larger
volume. The motor company is hurt less by the fluctuation in
sales because of less capital investment.
The following list includes 10 aspects of manufacturing operations
that will lower the cost of
products if they are considered in the design stage.

) Standardization. A product should be so designed that it should comprise of standard

parts, components and subassemblies. This will ensure interchangeability
and
competitiveness in world market place. Several industries today are trying
to get ISO 9000
certification to be able to enter world market.
i) Modular design. As distinguished from integral design, modular design offers advantages
of product assortment through various combinations of modules by assembly operation.
Examples of modularity are filing cabinets, meroform furniture, and using 18 threaded holes
in a ball for erecting structures of various designs.
(ii) Group technology. In manufacturing, grouping products according to similar processes in
cellular GT cells is a great advantage in reduced material handling.
iv) Automation. Low-cost automation can speed up production and is cost effective too.
() Assembly line. Flow shop type lines with dedicated machines arranged in U-type offer the
best utilization of machines.
(vi) Specifications and tolerances. Tolerance T is the permissible variation in a dimension
specified by the designer. Suitable machines with process capability P should be chosen so
that the Cp or relative precision index of 2 (approx.) is achieved.
(vii) Compact design. Compact design conserves material, reduces storage and transportation
costs, and is user friendly.
(vii) Foldable, stackable design. It reduces storage space and transportation cost. Sometimes,
Customer-assembled design can be offered.
(ix) Complementary product planning. Firms dealing in seasonal products should widen
their scope through multiple product strategies.
 MANUFACTURING
274 PRODUCT DESIGN AND
stock available
ble even in the junk
iunk
should be aware of at fiunction ratha
(x) Use of available stock.
Designers engineering philosophy aims ther
designs. Value
market, for inclusion in their
than part drawing.

10.4 ECONOMIC ANALYSIS Having obtaine

decision, in product design policy. studa
Economic analysis is the key to
management
market potentialities, and detailed
and
Sutficient information about
customer's requirement proposed product, the economic analvsi
of the
about the functional, operational
and quality aspects
questions
to the following
can be evaluated by seeking an answer
manufacturing the new product?
is required for
.What capital expenditure
piece are envisaged?
2. What total production costs per expected?
is the reasonable margin of profit that can be
3. What
and the features of the product render it competitive in
profit)
4. Do the price (= total costs +
the market?
expected to be sold?
5. In what numbers is the product
one single question in this
interdependence variables should be clearly emphasized. Not
Here, the of 1s, in fact, a cyclic
independently of the others. The economic analysiS
ist can be isolated and solved and the data provided
Each question is weighed in the light of the answer
and repetitive procedure. turn comes again to be re-
preceding question, and all the answers are checked when their
by the modifications
equilibrium is reached and no further
evaluated in the following cycles, until a state of
to these answers are required.

10.5 PROFIT AND COMPETITIVENESS

The measure of competitiveness of the product
corresponds to the portion of the market it succeeds
is prepared to put on the product
in capturing. This is largely dependent on the value the customer
assessment of value is not uniform
and on the ratio of this value to the price. As customer
everywhere, but subject to preference of features and performance or taste,
the ratio of value to price
the market is divided between
varies with customers. A state of equilibrium is formed, in which
the product
different preferences. This equilibrium may change if the ratio of value of price of
becomes more favourable, when compared with other products. Thus, the product increases
its share

of the market and becomes more competitive. Such an equilibrium is shown in Fig. 10.8, where
the
total costs .include set-up, materials, overheads, storage and distribution. The total profit
is

determined by the margin of profit per unit and by the sales volume. If the organization seeks to
increase its profit, it can try one of the following methods.

) Pure pricing strategy. Increase the sales price, but leave the total production to costs
unchanged. If such a course does not affect the sales volume, the total profit will be
proportional to the increase in the margin of profit per unit. Such an increase, however, can
upset the market equilibrium unfavourably, in that the ratio of customers' value of the
produet to its price will deteriorate and the products of competitors will become more
attractive. The market may shrink, and the total profit, may, in extreme cases, fall below its
rol 0riginal level. ai
 ECONOMIC FACTORS INFLUENCING DESIGN
275
tyt (a) Increase the sales price
Profit ntit fysieg2r,
Distribution
Storage
Overheads Profit (b) Expand the market
Labour
Set-up
Materials (c) Reduce total costs
Quantity
Profit (a) Increase the sales price by increasing
i a 6 Limitations:
the profit per unit.
() Competition
Total
i) Customer's willingness to pay
costs Danger: Shrinkage of market leading to possible
(unchanged) decline in total profit
Quantity 3 beulrs

Profit s ersh7 (b) Expand the market by reducing the profit per unit,
19h6 etc., by advertising.
Total costs Limitations: Competition
(unchanged) Danger: Too low amargin of profitper unit should be
Quantity avoided due to possible instabilities in the
market.
Profit
tris3 (C) Reduce total costs and pass some benefits to customers
by reducing sales price."
Total costs
reduced) Limitations: () Expenditure on new equipment
Quantity (ii) Basic labour and materials costs
(ii) Minimum requirements of quality
Fig. 10.8 Methods of increasing total profit.

(i) Marketing strategy (through design, advertising and pricing). Leave the total costs
unchanged, but try to improve the ratio of value to price, and thus widen the market. This
can be done: (i) by producing a better or more atractive product at the same cost, (i) by
launching an intense advertising campaign in order to boost the customer's assessment of
the product value, or (ii) by reducing the sales price, at the expense of the margin of profit
per unit, in the hope that the market will expand enough to increase total profit. A very
marginal profit per unit is, however, undesirable, as it allows little protection from possible
fluctuations in the market, and even slight instabilities may turn a small profit into a sizable
loss.
Cii) Reduction of in-house production cost. Reduce the total production costs and pass some
in the form of reduced sales price. If both the profit per
ofthe benefits to customers
and the size of the market increase, a substantial improvement in total profits will be
achieved. This necessitates a continuous search for better methods, better processes, better
materials and their utilization, and better management to reduce overheads. There are,
however, some limitations to the rate of improvenment one can attain, such as basic labour
9ale: and material costs and limited resources or expenditure on new,equipment and machines.
However, reducing production costs and thereby.expanding the, market, while sustaining
276 PRODUCT DESIGN AND MANUFACTURING
mo
production engineer. Probably, the
accepted quality standards, offers a challenge to the e
characteristic feature of this process is that it is both
dynamic and continuous that each
increasing productivity and standard of
Success is a further advance along the spiral of
living, as illustrated in (Fig. 10.9). trt
gives still further

Productivity and
Further
Further reduction in
investigation/s ce:i2n alt
increased costs and prices
Better tooling Gives

Productivity

Simplification/ Reduced costs

Standardization and prices
program

Which
DefinitelyfWidens the
requires
market Still greater
justifies
Present markets
position

Increased 2tler
Increase in
Requires demand
production
and sales

Further Further
increase in increase in
production Requires sales

93 pti?hl7s} as
Fig. 10.9 Spiral of increasing productivity. 9 te
ii

10.6 BREAK-EVEN ANALYSIS

Two approaches to break-even analysis are widely used:y ren 19inig y
t1. Conventional break-even chart
tt fi 9 Hng innigis
sie2. Profit-volume chart.

10.6.1 Conventional Break-Even Chart Approach 1 t-si 1o taoitoub

i
The effect of volume of production on profit is illustrated in Fig. 10.10.
The line of sales revenue
is shown by the straight line bQ, where b is the slope and Q, the
sales volume; b is also the sales
revenue per piece sold. In the linear model shown in Fig. 10.10,
the production costs involve the
following:
1.Fixed costs F which are independent of the number
of pieces produced and include salaries,
2 depreciation of plant and machinery. it eieut iM20 219bn tzoi
 ECONOMIC FACTORS INFLUENCING DESIGN 277
.ee'i
Profit

Break-even point
Variable
costsa2
costsF+
aQ
Total income
bQ/
Sales
Fixed costs
F

Plant activity (quantity)

Fig. 10.10 Break-even chart showing
loss and profit zones.

2. Variable costs aQ which consist of direct

material costs, labour costs, etc. These vary
ET&directly with production volume. 89 i at v.t-Ano ieytbis
so)
in t2i4
The point of intersection of line representing (F + aQ) with line
bQ is termed the break-even
point. The profit to the firm at this point is zero. A firm must produce more
pieces than break-even
volume Q1 to make a profit.
Mathematical model for break-even volume. Equating cost
(F + aQ) with sales revenue b2
results in the following equation: ig 13/2-Asnf
F+ aQ = bQ1 241
Rearranging, we get
F
(10.8)

Margin of safety. A plant is operating with a margin of safety (®) if the production volume Q2 is
more than the break-even point (BEP) denoted by Q:

Margin of safety (s) = 4 (10.9)

A very interesting simplification for margin of safety is as below: As can be seen from Fig. 10.11,

bO2-1) =iut
where P denotes profit. It can be shown that
P
'
(10.10)
Thus,
Q2 = Q1 (1t)0101 + PIF) (10.l1)
tis ston i.do 9Hiise
278 PRODUCT DESIGN AND MANUFACTURING

Profit

Average profit
80
Break-even i
60 point

40

20 FLoss
10
0 60 80
0 10 200 40
Sales income x 10 dollars
800
0 100 200 400 600
Quantity: number sold 91. 1
ats te i
A monthly break-even chart.
Fig. 10.11

and quantity sold for a fim

Ilustrative example (on break-even chart). Data on sales, total cost,
sales vs. quantity sold.
for 12 months is gathered. Figure 10.12 gives a graphical plot of

Profit
9d s7y ( 800 191 1obom laaitmsrfteie
sl Break-even point py atwoilot si ni atiur
600
193 nignoneol

400

9nlov neiutag g200

gA lee to rigud
100

0 100 300 500 700 800

Sales income x 10 dollars
0 3000 7000
Quantity, number sold
ln.grite 191t y
Fig. 10.12 An annual break-even chart.

Other data are as tabulated below

Annual data x 10 Derived monthly data x 10

Quantity sold 7931 pieces 661 pieces
Sales income 793.1 monetary units 66.1 monetary units
Total cost 723.2 monetary units
60.3 monetary units

The fixed cost F on monthly basis is 21 x 10 monetary units. Calculate the

BEP and safety margin ().
 ECONOMIC FACTORS INFLUENCING
DESIGN 279
Solution

where
C average total costs
F= average fixed costs
Q average quantity nw

60.3-21.01 x10-3
10-3s
Then
661
59.5 monetary units/piece

where 00E
S average sales income

Q average quantity sold = 06.1 X10°

100 monetary units/piece
The BEP is given by

- 100-593x10-520 pieces
=
A BEP on annual basis is shown in Fig. 10.12, in which break-even occurs at 12 x 520 6240
pieces

K3sertine Margin of safety s==21 5.83

x10=27.1%
For graphical solutions, Eilon [1] has suggested a simplified technique in which along the x-axis,
the sales volume is expressed in monetary units. Thus, amuioV-1ito19 ioubovqisiufA &a.0r
(60.3-21.0)10 uhug ertden inels twl
aC-F
a
S
it boyalqaib du
Slope b ==1 (slope 45°) ti2 t ute utons A Juto ign

B1 ni son
10.6.2 Profit-Volume Chart Approach 1 inu 6 iu002 o yuth ialavips u 2 Ant

The profit-volume chart is shown in Fig. 10.13, where the firm starts with a
negative profit F, being
o:
the initial fixed investment. The slope of profit-volume chart is given
by

(10.12)
280 PRODUCT DESIGN AND MANUFACTURING

2007

Profit
Break-even point
100

1000 2000 3000 4000 5000 7000 8000 176

100

200

300
=PIV ratio = 40.3 dollars/unit
chart.
Fig. 10.13 An annual profit-volume

where Q is the volume of production at the break-even point. Now,

since

we have
100C 9
Fe
(b- a)
FIb-a)t n
For the example considered in Section 10.6.1,

x
252 252625010 = 40.3 monetary units/piece

is-1 gnolu rtoita ni suisis1 beiiieeairh bvoyg i}1alid.conloz itairlqmg 7o

oneultos 2size
10.6.3 Multiproduct Profit-Volume Chart ii ai bo42sqs i s

For a firm making products A, B and C a multiproduct profit-volume chart can be plotted as shown
in Fig. 10.14, Such charthas the utility of showing whether the product-mix followed by a fim
a
is desirable or not. The BEP and profit for each of the products A, B and C can be displayed on a
single chart. A careful study of the profit-volume chart in Fig. 10.14 shows that making product A
alone results in a loss to the firm whereas making products A and B results in some profit. It is further
noted that substantial profits are made by making products A, B and C, as shown in Fig. 10.14.
Making an equivalent quantity of about 80 units results in sales income
of $32500 anda total profit
of $8000.
 ECONOMIC FACTORS
INFLUENCING DESIGN 281

Profit for product C

S1000 Profit for products A
and B Break-even for
Break-even for A C
Loss for product A
Total profit
Fixed
Costs Plant activity
for A Fixed
-1000 cost for
Fixed Ic 'Break-even for
cost for B the plant

-2000

-3000
273736te Pequivalent (= equivalent P/: 197 i, A e iuig iu
wollo)
4000 0 5000 10,000 15,000 20,000 25,000 30,000 35,000
Sales income, dollars

10 20 30 40 50 60 70 80n 90
Equivalent quantity, units
Fig. 10.14 Multiproduct profit-volume chart.

10.7 ECONOMICS OF A NEW PRODUCT DESIGN

(SAMUEL EILON MODEL)
In order to survive in the competitive atmosphere of industrial world,
new products or modification
of existing products is essential. The mathematical model of profit-volume analysis
is a useful tool
to determine whether the additional investment of (s) monetary units (due to process
change, design
change and material change) is desirable or not. If the profit accrued after investing
(s) is P2 and
profit before investing this amount is P1, a comparison between P2 and
P can be done anda decision
made.

Oto t1do 3
Oor Pi (9101 -F) (10.13)
where Q is the quantity sold. After investment (s),

Pp+ F+sio i bo Auil u s.ti

where is the quantity sold, or

t gpit 1u.tt uluPz = %02 -
F-sly itulny-ukg tei t
t titnnap i9
(10.14)
Ior the new model. Thenti t i09
93. ut-7,kuontProfit difference (P2-P) 2 (0202 115) S0
 MANUFACTURING
282 PRODUCT DESIGN AND

substituting, the relation

Setting P2- P20, we have, after

PIV ratio for old designin equation for (P2- P),

P/V ratio for new design

We finally have
(10.15)
tr:
to justiry investment (s) on desi
be greater than Q n
Equation (10.15) indicates that D = 1, O, must
change.
A numerical example is taken up to
make the notions clear.
cost (F) is 20,000 monetary units. While the
llustrative example. For a product, the annual fixed
A new design is beng planned with
annual profit is 4000 and average monthly sales is 82 pieces.
the new design, the PiV ratio shall increase
investment (s) of 8000 to be returned in 2 years. With
by 5%.
two different conditions, as follows:
Calculate the annual sales figure for the new design under
1. Net profit remains constant
2. In addition to the above profit, a yield of 10% of investment 8000 is to be accrued. (The
value s per year is 8000/2 = 4000)

4000
4000+20,000
0.95 1.11

ThenO Mo u3 JHUMAe) 3u1 0 2ChiOHOO3

aE0H A
.0
1.110, = 1.11 x 12 x 82 = 1092 pieces
fioiiran:tu eubote2 7inu oj ohon
t(b) In the first year, 10% of total (s) value of 8000 = 800 is to be added to profit value in
ngob u the equation, i.e. P2 = 4800. Jn le, iti
4800 +20,000+40000 = 114i1/
+F 4000+20,000
95 t 9otsd1tto1
then Q2= 1.14 x 12 x 82 = 1122 pieces. Thus, the firm should be able to sell at least
1122 pieces to obtain a profit of 4800 monetary units.

REVIEW QUESTIONS

1 What are the courses of action open to management in inmproving 971

profits? What are tn
likely hazards linked with each course of action?
2. What is a break-even chart? How does it help in arriving
at profit or loss corresponding
to a certain quantity of production?
What is a profit-voluine chart? Sketch a profit volume
it:fthu 9ili ri7
(t3. chart showing profit (P), break
even quantity Q, fixed cost (F), slope -
(b a) of the (Plv) line. wr 9u
4. How does profit? Volume break-even chart help in
determining product-mix of threc
products A, B, C. Why some firms continue making
products giving some loss along w
their premier products?
 ECONOMIC FACTORS INFLUENCING
DESIGN 283
5. Develop a modcl lo determine whether a firm making
roduct yielding a profit a profit P, should launch a new
P2 when the additional
investment is s.
6. what are the merits of following strategies in affecting
production costs? Discuss.
(a) modular design, (b) group technology, (c)
automation,
design, (f) specificalion and tolerances, (E) foldable (d) assembly line, (e) compact
and stackable design, and (h) use
of available stock.
7. What is meant by spiral of increasing productivity?
8. What is the approach to reliability based design? What is the relationship
reliability and factor of safety? Derive a formula linking between
reliability and factor of safety.
9. Write in brief about design for safety and mistake proofing.

REFERENCE CA OUGORTH

H9[1] Eilon, S., Elements of Production, Planning and Control, Macmillan, London, 1962;
3rd ed. reprinted by Universal Publishing Cop., Bombay, 1991.
o