Manufacturing Test Packaging and Delivery

In this operation the system is manufactured, tested, prepared, and packaged in a form ready for final delivery to the customer. The activities involved in this phase and their costs depend on whether we are considering a unique system or production of several identical units.

Examples of unique systems include air traffic control, large communication systems, air defense systems, automobile factories, etc. We call these made-to-order systems. The costs of manufacturing for these systems include the costs of purchasing the individual components of the system, integrating, testing, and often, installing. The total cost of all of the phases up to this point is the initial cost of the system. To this cost, the producer adds a profit and calls it the system price. In our financial analysis language, from the customer's point of view this is the initial investment.

Some items such as automobiles, television sets, and aircraft (military or commercial) are produced in quantities. From the buyer's point of view, these are ready-made items. The quantity can be in one digit number, tens, thousands, or millions. For these items, there are two basic costs. Fixed costs (FC) and variable costs (VC). Fixed costs are those costs that are not dependent on the number of production units. Costs of phases 1,2, and 3 are of this type. Variable costs are dependent on the number of units manufactured. Material and labor are examples of this type. The total cost of a production unit is, therefore, the total of the fixed and variable cost divided by the number produced. The cost to the customer at this point is the unit's cost plus any profits added to the cost. This is his initial investment.

where a is the variable cost associated with one unit, and N is the number of units produced. Fig. 10.2 presents the relationship of fixed cost, variable cost, unit cost, and the number of units produced. As expected the total cost of one unit decreases when the number of units increases. However, we have to be careful not to apply this principle indiscriminately. When the number of production units goes beyond the capacity of the system, then additional fixed costs occur in increasing the system capacity to accommodate the additional units. In this case, we have to go back and calculate the relevant cost associated with the new production capacity.

N Limber of Units

Cost Per Unit

Num be r of Units

Num be r of Units

There are also other costs associated with purchasing activity including requirement generation, bid document preparation, evaluation ofbids, and other necessary activities.

These costs can be included in the initial investment.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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