ESTIMATING COST MODELS: Segmenting Model.

The segmenting model can be described as "divide and conquer."An estimate is decomposed into its individual components, estimates aremade at those lower levels, and then the estimates are aggregated (added) back together. It is much easier to estimate at the lower levels because they are more readily understood. This approach is common in engineering estimating in many applications and for any level of accuracy needed. In planning the camp trip of Example 2-5, the overall estimate was segmented into the costs for travel, living, and entertainment. The example illustrated the segmenting model (division of the overall estimate into the various categories) togetherwith the unit factormodel to make the subestimates for each category.Example 2-6 provides another example of the segmenting approach.

EXAMPLE 2-6

Clean Lawn Corp. a manufacturer of yard equipment is planning to introduce a new high-end industrial-use lawn mower called the Grass Grabber. The Grass Grabber is designed as a walk- behind self-propelled mower. Clean Lawn engineers have been asked by the accounting depart'ment to estimate the material costs that will make up the new mower.The material cost estimate will be used, along with estimates for labor and overhead to evaluate the potential of this new model.

SOLUTION.

The engineers decide to decompose the design specifications for the Grass Grabber into its subcomponents, estimate the material costs for each of the subcomponents, and then sum these costs up to obtain their overall estimate. The engineers are using a segmenting approach to build up their estimate. Ater careful consideration; the engineers have divided the mower into the following major systems: chassis, drive train, controls, and cutting/collecction system. Each of these isfqrther divided as appropriate, and unit material costs were estimated at this lowest of levels as follows:


The total material cost estimate of $173.45 was calculated by summing up theestimates for each of the four major subsystemlevels (chassis, drive train, controls, and cuttinglcollection system).

It should be noted that this cost represents only thematerial portion of the overall cost to produce the mowers. Other costs would include labor and overhead items.


In Example 2-6 the engineers at Clean Lawn Corp. decomposed the cost estimation problem into logical elements. The scheme they used of decomposing cost items and numbering the material components (A.I, A.I, A.2, etc.) is known as a work break down structure. This technique is commonlyused in engineering cost estimating and project management of large products, processes, or projects. A work break down structure decomposes a large "work package" into its constituent parts which can then be estimated or managed individually. In Example 2-6 the work breakdown structure of the Grass Grabber has three
levels.At the toplevel is the product itself, at the second level are the fourmajor subsystems, and at the third level are the individual cost items. Imagine what the product work break-down structure for aBoeing 777 looks like.Then imagine trying tomanage the 777 design, engineering, construction, and costing without a tool like the work breakdown structure.

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