Professional Ethics and Economic Decisions

Many of the fundamentals of engineering ethics are intertwined with the roles of money and  economics-based decisions in the making of professionally ethical judgments. Some of these  integral connections are discussed here, plus sections in later chapters discuss additional aspects  of ethics and economics. For example, Chapter 9, Benefi t/Cost Analysis and Public Sector Eco- nomics, includes material on the ethics of public project contracts and public policy. Although it  is very limited in scope and space, it is anticipated that this coverage of the important role of economics in engineering ethics will prompt further interest on the part of students and instructors of engineering economy.

The terms   morals  and   ethics  are commonly used interchangeably, yet they have slightly  different interpretations. Morals usually relate to the underlying tenets that form the character  and conduct of a person in judging right and wrong. Ethical practices can be evaluated by  using a code of morals or   code of ethics  that forms the standards to guide decisions and actions of individuals and organizations in a profession, for example, electrical, chemical,  mechanical, industrial, or civil engineering. There are several different levels and types of  morals and ethics.

Universal  or  common  morals    These are fundamental moral beliefs held by virtually all people. Most people agree that to steal, murder, lie, or physically harm someone is wrong.

It is possible for   actions  and   intentions  to come into confl ict concerning a common moral.  Consider the World Trade Center buildings in New York City. After their collapse on September 11,  2001, it was apparent that the design was not suffi  cient to withstand the heat generated by the  fi  restorm caused by the impact of an aircraft. The structural engineers who worked on the design  surely did not have the intent to harm or kill occupants in the buildings. However, their design  actions did not foresee this outcome as a measurable possibility. Did they violate the common  moral belief of not doing harm to others or murdering?

Individual  or  personal  morals   These are the moral beliefs that a person has and maintains  over time. These usually parallel the common morals in that stealing, lying, murdering, etc. are immoral acts.

It is quite possible that an individual strongly supports the common morals and has excellent  personal morals, but these may confl ict from time to time when decisions must be made. Con- sider the engineering student who genuinely believes that cheating is wrong. If he or she does not  know how to work some test problems, but must make a certain minimum grade on the fi  nal  exam to graduate, the decision to cheat or not on the fi nal exam is an exercise in following or violating a personal moral.

Professional  or  engineering  ethics   Professionals in a specifi c discipline are guided in their  decision making and performance of work activities by a formal standard or code. The code  states the commonly accepted standards of honesty and integrity that each individual is expected  to demonstrate in her or his practice. There are codes of ethics for medical doctors, attorneys,  and, of course, engineers.

Although each engineering profession has its own code of ethics, the   Code of Ethics for Engineers  published by the National Society of Professional Engineers (NSPE) is very com- monly used and quoted. This code, reprinted in its entirety in Appendix C, includes numerous sections that have direct or indirect economic and fi nancial impact upon the designs, actions, and decisions that engineers make in their professional dealings. Here are three examples from  the Code:

 “Engineers, in the fulfi llment of their duties, shall hold paramount the   safety, health, and welfare of the public .” (section I.1) 
“Engineers  shall    not accept fi nancial or other considerations , including free engineering designs, from material or equipment suppliers for specifying their product.” (section III.5.a)
“Engineers using designs supplied by a client recognize that the   designs remain the property of the client  and may not be duplicated by the engineer for others without express permission.” (section  III.9.b)

As with common and personal morals, confl  icts can easily rise in the mind of an engineer  between his or her own ethics and that of the employing corporation. Consider a manufacturing  engineer who has recently come to fi  rmly disagree morally with war and its negative effects on  human beings. Suppose the engineer has worked for years in a military defense contractor’s  facility and does the detailed cost estimations and economic evaluations of producing fi  ghter jets for the Air Force. The Code of Ethics for Engineers is silent on the ethics of producing and  using war materiel. Although the employer and the engineer are not violating any ethics code,  the engineer, as an individual, is stressed in this position. Like many people during a declining  national economy, retention of this job is of paramount importance to the family and the engineer. Confl  icts such as this can place individuals in real dilemmas with no or mostly  unsatisfactory  alternatives.
 
At first thought, it may not be apparent how activities related to engineering economics may  present an ethical challenge to an individual, a company, or a public servant in government ser- vice. Many money-related situations, such as those that follow, can have ethical dimensions.

In the design stage:

   •     Safety factors are compromised to ensure that a price bid comes in as low as possible. 
   •     Family or personal connections with individuals in a company offer unfair or insider information that allows costs to be cut in strategic areas of a project. 
   •     A  potential  vendor  offers  specifi  cations for company-specifi c equipment, and the design engineer does not have suffi cient time to determine if this equipment will meet the needs of the  project being designed and costed.   
  
While the system is operating:

   •     Delayed or below-standard maintenance can be performed to save money when cost overruns  exist in other segments of a project. 
   •     Opportunities to purchase cheaper repair parts can save money for a subcontractor working on  a fi  xed-price contract. 
   •     Safety margins are compromised because of cost, personal inconvenience to workers, tight  time  schedules,  etc.   

A good example of the last item—safety is compromised while operating the system—is the  situation that arose in 1984 in Bhopal, India (Martin and Schinzinger 2005, pp. 245–8). A Union  Carbide plant manufacturing the highly toxic pesticide chemical methyl isocyanate (MIC) experienced a large gas leak from high-pressure tanks. Some 500,000 persons were exposed to inhalation of this deadly gas that burns moist parts of the body. There were 2500 to 3000 deaths within days, and over the following 10-year period, some 12,000 death claims and 870,000 personal  injury claims were recorded. Although Union Carbide owned the facility, the Indian government  had only Indian workers in the plant. Safety practices clearly eroded due to cost-cutting measures, insuffi cient repair parts, and reduction in personnel to save salary money. However, one of  the surprising practices that caused unnecessary harm to workers was the fact that masks, gloves, and other protective gear were not worn by workers in close proximity to the tanks containing MIC. Why? Unlike in plants in the United States and other countries, there was no air conditioning in the Indian plant, resulting in high ambient temperatures in the facility.

Many ethical questions arise when corporations operate in international settings where the  corporate rules, worker incentives, cultural practices, and costs in the home country differ from  those in the host country. Often these ethical dilemmas are fundamentally based in the economics  that provide cheaper labor, reduced raw material costs, less government oversight, and a host of other cost-reducing factors. When an engineering economy study is performed, it is important for  the engineer performing the study to consider all ethically related matters to ensure that the cost and revenue estimates refl ect what is likely to happen once the project or system is operating.

It is important to understand that the translation from universal morals to personal morals and  professional ethics does vary from one culture and country to another. As an example, consider the  common belief (universal moral) that the awarding of contracts and fi nancial arrangements for services to be performed (for government or business) should be accomplished in a fair and transparent  fashion. In some societies and cultures, corruption in the process of contract making is common and  often “overlooked” by the local authorities, who may also be involved in the affairs. Are these im- moral or unethical practices? Most would say, “Yes, this should not be allowed. Find and punish the  individuals involved.” Yet, such practices do continue, thus indicating the differences in interpretation of common morals as they are translated into the ethics of individuals and professionals.

ECONOMIC: Classifying Problems and The Decision-Making Process.

Classifying Problems

Many problems are simple and thus easy to solve. Others are of intermediate difficulty and need considerable thought and/or calculation to properly evaluate.These intermediate problems tend to have a substantial economic component, hence are good candidates for economic analysis. Complex problems, on the other hand, often contain people elements, along with political and economic components. Economic analysis is still very important, but the best alternativemust be selected considering all criteria-not just economics.

The Decision-Making Process

Rational decision.making uses a logicalmethod of analysis to select the best alternativefrom
among the feasible alternatives.The following nine steps can be followed sequentially,but
decision makers often repeat some steps, undertake some simultaneously, and skip others
altogether.

1. Recognize the problem.
2. Define the goal or objective:What is the task?
3. Assemble relevant data:What are the facts? Are more data needed, and is it worth more than the cost to obtain it?
4. Identify feasible alternatives
5. Select the criterion for choosing the best alternative: possible criteria include political, economic, environmental, and humanitarian. The single criterion may be a composite of several different criteria.
6. Mathematically model the various interrelationships.
7. Predict the outcomes for each ilIiemative.
8. Choose the best alternative.
9. Audit the results.

Engineering decision making refers to solving substantial engineering problems in which economic aspects dominate and economic efficiency is the criterion for choosing from among possible alternatives. It is a particular case of the general decision-making process. Some of the unusual aspects of engineering decision making are as follows:

1. Cost-accounting systems,while an important source of cost data, contain allocations of indirect costs that may be inappropriate for use in economic analysis.

2. The various consequences--costs and benefits-of an alternativemay be of three types:

(a) Market consequences-there are established market prices
(b) Extra-market consequences-there are no dii-ectmarket prices, but prices can be assigned by indirect means
(c) Intangible consequences-valued by judgment, not by monetary prices

3. The economic criteria for judging alternatives can be reduced to three cases:

(a) For fixed input: maximize benefits or other outputs.
(b) For fixed output: minimize costs or other inputs.
(c) When neither input nor output is fixed:maximizethe differencebetween benefits and costs or, more simply stated, maximize profit.

The third case states the general rule from which both the first and second cases
may be derived.

4. To choose among the alternatives, the market consequences and extra-market consequences are organized into a cash flow diagram. We will see in Chapter 3 that engineering economic calculations can be used to compare differing cash flows.

These outcomes are compared against the selection criterion.From this comparison plus the consequences not included in themonetary analysis, the best alternative is selected.

5. An essential part of engineering decision making is the postaudit of results. This step helps to ensure that projected benefits are obtained and to encourage realistic estimates in analyses.

ENGINEERING DECISION MAKING FOR CURRENT COSTS AND EXAMPLES.

Some of the easiest forms of engineering decision making deal with problems of alternate designs, methods, or materials. If results of the decision occur in a very short period of time, one can quickly add up the costs and benefits for each alternative. Then, using the suitable economic criterion, the best alternative can be identified. Three example problems illustrate these situations.

EXAMPLE 1

A concrete aggregatemix is required to contain at least 31% sand by volume for proper batching.

One source of material, which has 25% sand and 75% coarse aggregate, sells for $3 per cubic meter (m3).Another source, which has 40% sand and 60% coarse aggregate, sells for $4.4O/m3.

Determine the least cost per cubic meter of blended aggregates.

SOLUTION

The least cost of blended aggregates will result from maximum use of the lower-cost material.

The higher-cost material will be used to increase the proportion of sand up to the minimum level (31%) specified.

Let x = Portion of blended aggregates from $3.00/m3.source
1 - x =Portion of blended aggregates from $4.40/m3 source

Sand Balance

Thus the blended aggregates will contain

60% of $3.00/m3 material
40% of $4.40/m3 material

The least cost per cubic meter of blended.aggregates is

EXAMPLE 2

A machine part is manufactured at a unit cost of 40 C for material and 15C for direct labor. An investment of $500,000 in tooling is required. The order calls for 3 million pieces. Halfway throughthe order, a new method of manufacturecan.be put into.effect that wi11 reduce the until costs to 34 C for material and 10 C for direct labor but it: will require $10000 for additional tooling. This tooling will not be useful for future orders. Other cost are allocated at 2.5 times the direct labor  cost. What, if anything , should be done?

SOLUTION

Since there is only one way to handle first 1.5 million pieces, our problem concerns only the second half of the order

Before making a final decision, one should closely examine the Other costs to see that they do, in fact, vary as theDirect labor cost varies.Assuming they do, the decisionwould be to change the manufacturingmethod.

EXAMPLE 3

In the design of a cold-storage warehouse, the specifications call for a maximum heat transfer through the warehouse walls of 30,000 joules per hour per square meter of wallwhen there is a 30°C temperature difference between the inside surface and the outside surface of the insulation.

The two insulation materials being considered are as follows:

SOLUTION

There are two steps required to solve the problem. :First, the required thickness of each of the alternate materials must be calculated. Then, since the problem is one of providing a fixed.output (heat transfer through the wall limited to a fixedmaximum amount), the criterion is to minimize the input (cost).

The foamed insulation is the lesser cost alternative.However, there is an intangible constrain that  must be considered.How thick is the available wall space? Engineering economy and the time  value of money are needed to decide what the maximum heat transfer should be.What is the cost of more insulation versus the cost of cooling the warehouse over its life?

Rational Decision Making: Audit the Results.

An audit of the results is a comparison of what happened against the predictions. Do the results of a decision analysis reasonably agree with its projections? If a new machine tool was purchased to save labor and improve quality,did it? If so, the economic analysis seems to be accurate. If the savings are not being obtained, what was overlooked? The audit may help ensure that projected operating advantages are ultimately obtained. On the other hand, the economic analysis projections may have been unduly optimistic.Wewant to know this, too, so that the mistakes that led to the inaccurate projection are not repeated. Finally, an effectiveway to promote realistic economic analysis calculations is for all people involved to know that there will be an audit of the results!

Rational Decision Making: Choosing the Best Alternative.

Earlier we indicated that choosing the best alternativemay be simply a matter of determining which alternative best meets the selection criterion.But the solutions to most problems in economics have market consequences, extra-market consequences, and intangible consequences. Since the intangible consequences of possible alternatives are left out of the numerical calculations, they should be introduced into the decision-making process at this point. The alternative to be chosen is the one that best meets the choice criterion after considering both the numerical consequences and the consequences not included in the monetary analysis.

During the decision-makingprocess certain feasible alternativesare eliminated because they are dominated by other, better alternatives. For example, shopping for a computer on-line may allow you to buy a custom-configured computer for less money than a stock computer in a local store. Buying at the local store is feasible, but dominated.While elimi-nating dominated alternativesmakes the decision-making process more efficient, there are dangers.

Having examined the structure of the decision-making process, it is appropriate to ask, When is a decision made, and who makes it? If one person performs all the steps in decision making, then he is the decision maker. When he makes the decision is less clear.

The selection of the feasible alternativesmay be the key item, with the rest of the analysis a methodical process leading to the inevitable decision. We can see that the decision may be drastically affected, or even predetermined, by the way in which the decision-making process is carried out. This is illustrated by the following example.

Liz, a young engineer, was assigned tomake an analysis of additional equipment needed for the machine shop. The single criterion for selection was that the equipment should be the most economical, considering both initial costs and future operating costs. A little investigation by Liz revealed three practical alternatives:

1. A new specialized lathe
2. A new general-purpose lathe
3. A rebuilt lathe available from a used-equipment dealer

A preliminary analysis indicated that the rebuilt lathe would be the most economical.

Liz did not like the idea of buying a rebuilt lathe, so she decided to discard that alternative. She prepared a two-alternative analysis that showed that the general-purpose lathe was more economical than the specialized lathe. She presented this completed analysis to her manager. The manager assumed that the two alternatives presented were the best of all feasible alternatives, and he approved Liz's recommendation.

At this point we should ask: Who was the decision maker, Liz or her n'Ianager? Although the manager signed his name at the bottom of the economic analysis worksheets to authorize purchasing the general-purpose lathe, he was merely authorizing what already had been made inevitable, and thus he was not the decision maker. Rather Liz had made the key decision when she decided to discard the most economical alternative from further consideration. The result was a decision to buy the better of the two less economically desirable alternatives.

Rational Decision Making: Predicting the Outcomes for Each Alternative.

A model and the data are used to predict the outcomes for each feasible alternative. As was suggested earlier, each alternative might produce a variety of out comes. Selecting a motorcycle, rather than a bicycle, for example, may make the fuel supplier happy, the eighbors unhappy, the environment more polluted, and one's savings account smaller.But, to avoid unnecessary complications, we assume that decision making is based on a single criterion for measuring the relative attractiveness of the various alternatives. If necessary,
one could devise a single composite criterion that is theweighted average of several different choice criteria.."

To choose the best alternative, the outcomes for each alternative must be stated in a comparable way.Usually the consequences of each alternativeare stated in terms ofmoney, that is, in the form of costs and benefits.

This resolution of consequences is done with all monetary and nonmonetary consequences. The consequences can also be categorized as follows:

Market consequences-where there are established market prices available Extra-market consequences-no direct market prices, so priced indirectly Intangible consequences-valued by judgment not monetary prices.

In the initial problems we will examine, the costs and benefits occur over a short time period and can be considered as occurring at the same time. In other situations the various costs and benefits take place in a longer time period. The result may be costs at one point in time followed by periodic benefits.We will resolve these in the next chapter into a cash flow diagram to showthe timing of the various costs and benefits.

For these longer-term problems, the most common error is to assume that the current situation will be unchanged for the do-nothing alternative. For example, current profits will shrink or vanish as a result of the actions of competitors and the expectations of customers; and trafficc on gestion normally increases over the years as the number of vehicles increases-doing nothing does not imply that the situation will not change.

Rational Decision Making: Constructing the Model.

At some point in the decision-making process, the various elements must be brought together. The objective, relevant data, feasible alternatives, and selection criterion must be merged. For example, if one were considering borrowing money to pay for an automobile, there is a mathematical relationship between the following variables for the loan: amount, interest rate, duration, and monthly payment.

Constructing the interrelationships between the decision-making elements is frequently called model building or constructing the model. Toan engineer,modelingmaybe a scaled physical representation of the real thing or system or a mathematical equation, or set of equations, describing the desired interrelationships. In a laboratory there may be a physical model, but in economic decision making, the model is usually mathematical.

In modeling, it is helpful to represent only that part of the real systemthat is important to the problemat hand. Thus, the mathematicalmodel of the student capacity of a classroom might be,

where
1  =  length of classroom, in meters
w =  widthof classroom,inmeters
k  =  classroom arrangement factor

The equation for student capacity of a classroom is a very simple model; yet it may be adequate for the problem being solved.

Rational Decision Making: Select the Criterion to Determine the Best Alternative.

The central task of decisionmaking is choosing from among alternatives.Howis the choice made? Logically, to choose the best alternative, we must define what we mean by best.

There must be a criterion, or set of criteria, to judge which alternative is best. Now, we recognize that best is a relative adjective on one end of the following relative subjective judgment:

relative subjective judgment spectrum

 

Since we are dealing in relative terms, rather than absolute values, the selection will be the alternative that is relatively the most desirable. Consider a driver found guilty of speeding and given the alternativesof a $175 fine or 3 days injail. In absolute terms, neither alternative is good. But on a relative basis, one simply makes the best of a bad situation.

There maybe unlimited number of ways that one might judge the various alternatives.

Several possible criteria are:

- Create the least disturbance to the environment.
- Improve the distribution of wealth among people.
- Minimize the expenditure of money.
- Ensure that the benefits to thosewho gain fromthe decision are greater than the losses of those who are harmed by the decision.
- Minimize the time to accomplish the goal or objective.
- Minimize unemployment. .. .
- Maximize profit.

Selecting the criterion for choosing the best alternative will not be easy if different groups support different criteria and desire different alternatives.The criteria may conflict.

For example, minimizing unemploymentmay require increasing the expenditure of money.

Or minimizing environmental disturbance may conflict with minimizing time to complete the project. The disagreement between management and labor in collective bargaining (concerningwages andconditions of employment) reflectsa disagreement over the objective and the criterion for selecting the best alternative.

The last criterion-maximize profit-is the one normally selected in engineering decision making. When this criterion is used, all problems fall into one of three categories: fixed input, fixed output, or neither input nor output fixed.

Fixed Input. The amount of money or other input resources (like labor, materials, or equipment) are fixed.The objective is to effectively utilize them.

Examples:
· A project engineer has a budget of $350,000 to overhaul a portion of a petroleum refinery.
·Youhave $300 to buy clothes for the start of school.

For economic efficiency, the appropriate criterion is to maximize the benefits or other outputs.

Fixed Output. There is a fixed task (or other output objectives or results) to be
accomplished.

Examples:

· A civil engineering firm has been given the job of surveying a tract of land and preparing a "record of survey" map.
·Youwish to purchase a new car with no optional equipment.

The economically efficient criterion for a situation of fixed output is to minimize the costs or other inputs.

Neither Input norOutput Fixed. The third category is the general situation, in whichthe
amount of money or other inputs is not fixed, nor is the amount of benefits or other outputs.

Examples:
· A consulting engineering firm has more work available than it can handle. It is considering paying the staff for working evenings to increase the amount of design work it can perform.

· One might wish to invest in the stock market, but the total cost of the investment is
not fixed, and neither are the benefits.

·An automobile battery is needed. Batteries are available at different prices, and although each will provide the energy to start the vehicle, the useful lives of the various products are different.

What should be the criterion in this category? Obviously, to be as economically efficientas possible, we must maximize the difference between the return from the investment (benefits) and the cost of the investment.

Since the difference between the benefits and the costs is simply profit, a business person would define this criterion as maximizing profit.

For the three categories, the proper economic criteria are:

 

Rational Decision Making: Identify Feasible Alternatives.

One must keep in mind that unless the best alternative is considered, the result will always be suboptimal. Two types of alternatives are sometimes ignored. First, in many situations a do-nothing alternative is flexiible.This may be the "Let's keep doing what we are now doing," or the "Let's not spend any money on that problem" alternative. Second, there are often feasible (but unglamorous) alternatives, such as "Patch it up and keep it running for another year before replacing it."

There is no way to ensure that the best alternative is among the alternatives being considered. One should try to be certain that all conventional alternatives have been listed and then make a serious effort to suggest innovative solutions. Sometimes a group of people considering alternatives in an innovative atmosphere-brainstorming--can be helpful.

Even impractical alternatives may lead to a better possibility. The payoff from a new, innovative alternative can far exceed the value of carefully selecting between the existing alternatives.

Any good listing of alternativeswillproduce both practical andimpractical alternatives.

It would be of little use, however,to seriously consider an alternativethat cannot be adopted.

An alternative may be infeasible for a variety of reasons. For example, it might violate fundamental laws of science, require resources or materials that cannot be obtained, or it might not be availablein time.Only the feasible alternativesare retained for further analysis.

Rational Decision Making: Assemble Relevant Data.

To make a good decision, one must first assemble good information. In addition to all the published information, there is a vast quantity of information that is not written down anywhere but is stored as individuals' knowledge and experience.There is also information that remains ungathered. A question like "How many people in your town would be interested in buying a pair of left-handed scissors?" cannot be answered by examining published data or by asking anyone person. Market research or other data gathering would be required to obtain the desired information.

From all this information, what is relevant in a specific decision-making process?

Deciding which data are important andwhich are notmaybe a complextask.The availability of data further complicates this task. Some data are available immediately at little or no cost in published form; other data are available by consulting with specific knowledgeable people; still other data require surveys or research to assemble the information. Some data will be of high quality-that is,precise and accurate,while other datamay rely onindividual judgment for an estimate.

If there is a published price or a contract, the data may be known exactly. In most cases, the data is uncertain. What will it cost to build the dam? How many vehicles will use the bridge next year and in year 20? How fast will a competing firm introduce a competing product? Howwill demand depend on growth in the economy? Future costs and revenues are uncertain, and the range of likely values should be part of assembling relevant data.

The problem's time horizon is part of the data that must be assembled. How long will the building or equipment last? How long will it be needed? Will it be scrapped, sold, or shifted to another use? In some cases, such as for a road or a tunnel, the life may be centuries with regular maintenance and occasional re-building. A shorter time period, such as 50 years, may be chosen as the problem's time horizon, so that decisions can be based on more reliable data.

In engineering decision making, an important source of data is a firm's own accounting system. These data must be examined quite carefully. Accounting data focuses on past information, and engineering judgment must often be applied to estimate current and future values. For example, accounting records can show the past cost of buying computers, but engineering judgment is required to estimate the future cost of buying computers.

Financial and cost accounting are designed to show accounting values and the flow of money-specifically costs and benefits-in a company's operations. Where costs are directly related to specific operations, there is no difficulty; but there are other costs that are not related to specific operations. These indirect costs, or overhead, are usually allocated to a company's operations and products by some arbitrary method. The results are generally satisfactory for cost-accounting purposes but may be unreliable for use in economic analysis.

To create a meaningful economic analysis, we must determine the true differences between alternatives, which might require some adjustment of cost-accounting data. The following example illustrates this situation.

EXAMPLE:

The cost-accounting records of a large company show the average monthly costs for the three-person printing department. The wages of the three--departmentmembers and benefits, such as vacation and sick leave, make up the first category of direct labor. The company's indirect or overhead costs-such as heat, electricity, and employee insurance-must be distributed to its various departments in some manner and, like many other firms, this one usesfloor space as the basis for its allocations.

The printing department charges the other departments for its services to recover its $18,000 monthly cost. For example, the charge to run 1000copies of an announcement is:

The shipping department checkswith a commercial printer which would print the same 1000 copies for $22.95. Although the shipping department needs only about 30,000 copies printed a month, its foreman decides to stop using the printing department and have the work done by the outside printer. The in-house printing department objects to this. As a result, the general manager has asked you to study the situation and recommend what should be done.

SOLUTION

Much of the printing department's output reveals the company's costs, prices, and other financial information.

The company president considers the printing department necessary to prevent disclosing such information to people outside the company.

A review of the cost-accounting charges reveals nothing unusual. The charges made by the printing department cover direct labor, materials and supplies, and overhead. The allocation of indirect costs is a customary procedure in cost-accounting systems, but it is potentially misleading for misleading for decision making, as the following discussion indicates.

The shipping department would reduce its cost from $793.50 to $688.50 by using the outside
printer. In that case, how much would the printing department's costs decline?We will examine
each of the cost components:

1. Direct Labor. If the printing department had been working overtime, then.the overtime could be reduced or eliminated. But, assuming no overtime, how much would the saving be? It seems unlikely.thata printer could be fired or evenput on less.than'a 40~hourwork week. Thus, although there might be a $228 saving, it is likely that there will be no reduction in direct labor.

2. Materials and Supplif?s.There would be a $294 saving illmaterials aIldsupplies. ~ ~

3. Allocated Overhead Costs: TherewiU be no reduction"inthe prirlting.dePartm~nt's monthly $5000 overhead, for there will be 110reduction in departmentf:lOOl:space. (Actually, of course, theremay be a slight reductionin the AfII1:SpO~er~,g§ls!fth~l?ri1l,Wt~d~l?artInent does less work.)

The firm will save $294 in materials and.supplies ancll)1ayorillay not save $228 in direct labor if the printing department no longer does the shipping departament work. The maximun saving would be $294 + 228 =  $522. But if the shipping departament is permited obtain its printing from the outside printer, the firm must pay $688.50 a month.



The saving from not doing the shipping departInent work in the printing deparrtanebt would not.exceed $522,and it. probably would be only $294, The result would bea net increase in cost to the firm. For this reason, the shipping department should be discouraged from sending itsprintirig to the outside printer.

Gathering cost data presents other difficulties. One way to look at the financial consequences--costs and benefits-of various alternatives is as follows.

-Market Consequences. These consequences have an established price in the marketplace. We can quickly determine raw material prices, machinery costs, labor costs, and so forth.

-Extra-Market Consequences. There are other items that are not directly priced in the marketplace. But by indirect means, a price may be assigned to these items. (Economists call these prices shadow prices.) Examples might be the cost of an employee injury or the value to employees of going from a 5-day to a 4-day,40-hour week.

-Intangible Consequences. Numerical economic analysis probably never fully describes the real differences between alternatives. The tendency to leave out consequences that do not have a significant impact on the analysis itself, or on the conversion of the finaldecision into actualmoney, is difficult to resolve or eliminate.

How does one evaluate the potential loss of workers' jobs due to automation?What is the value of landscaping around a factory? These and a variety of other consequences may be left out of the numerical calculations, but they should be considered in conjunction with the numerical results in reaching a decision.

Rational Decision Making: Define the Goal or Objective.

The goal or objective can be a grand, overall goal of a person or a firm. For example, a personal goal could be to lead a pleasant and meaningful life, and a firm's goal is usually to operate profitably.The presence of multiple, conflicting goals is often the foundation of complex problems.

But an objective need not be a grand, overall goal of a business or an individual. It may be quite narrow and specific: "I want to payoff the loan on my car by May," or "The plant must produce 300 golf carts in the next 2 weeks," are more limited objectives.Thus, defining the objective is the act of exactly describing the task or goal.

Rational Decision Making: Recognize the Problem.

The starting point in rational decision making is recognizing that a problem exists.

Some years ago, for example, it was discovered that several species of ocean fish contained substantial concentrations of mercury.The decision-making process began with this recognition of a problem, and the rush was on to determine what should be done.

Research revealedthat fishtakenfromthe ocean decadesbefore andpreservedin laboratories also contained similar concentrations of mercury.Thus, the problem had existed for a long time but had not been recognized.

In typical situations, recognition is obvious and immediate.An auto accident, an over-drawn check, a burned-out motor, an exhausted supply of parts all produce the recognition of a problem.Once we are aware of the problem,we can solve it as best we can.Many firms establish programs for total quality management (TQM) or continuous improvement (CI) that are designed to identify problems, so that they can be solved.

ECONOMIC ANALYIS: THE DECISION-MAKING PROCESS.

Decision making may take place by default; that is, a person may not consciously recognize that an opportunity for decision making exists. This fact leads us to a first element in a definition of decision making.

To have a decision-making situation, there must be at least two alternatives available. If only one course of action is available, there can be no decision making, for there is nothing to decide. There is no alternative but to proceed with the single available course of action. (It is rather unusual to find that there are no alternative courses of action. More frequently, alternatives simply are not recognized.)

At this point we might conclude that the decision-making process consists of choosing from among alternativecourses of action. But this is an inadequate definition.Consider the following:

At a race track, a bettor was uncertain about which of the five horses to bet on in the next race. He closed his eyes and pointed his finger at the list of horses printed in the racing program. Upon opening his eyes, he saw that he was pointing to horse number 4.

He hurried off to place his bet on that horse.

Does the racehorse selection represent the process of decision making? Yes, it clearly was a process of choosing among alternatives (assuming the bettor had already ruled out the "do-nothing" alternative of placing no bet). But the particular method of deciding seems inadequate and irrational.We want to deal with rational decision making.

⇒Rational Decision Making

The Role of Engieneering Economic Analysis.

Engineering economic analysis is most suitable for intermediate problems and the economic aspects of complex problems. They have these qualities:

1. The problem is important enough to justify our giving it serious thought and effort.
2. The problem can't be worked in one's head-that is, a careful analysis requires that we organize the problem and all the various consequences, and this is just too much to be done all at once.
3. The problem has economic aspects important in reaching a decision.

When problems meet these three criteria, engineering economic analysis is an appropriate technique for seeking a solution.Since vast numbers of problems that one will encounter in the businessworld (and in one's personal life) meet these criteria, engineering economic analysis is often required.

⇒Examples of Engineering Economic Analysis

Economic Decisions: A Sea Of Problems.

A careful look at the world around us clearly demonstrates that we are surrounded by a sea of problems.

There does not seemto be any exactway of classifying them, simply because they are so diverse in complexity and "personality." One approach would be to arrange problems by their difficulty.

Simple Problems
Onthe lowerendof our classificationof problemsaresimplesituations.

   ·Should I pay cash or use my credit card?
   · Do I buy a semester parking pass or use the parking meters?
   ·Shall we replace a burned-out motor?
   · If we use three crates of an item a week, how many crates should we buy at a time?

These are pretty simple problems, and good solutions do not require much time or effort.

Intermediate Problems
At the middle level of complexity we find problems that are primarily economic.

   ·Shall I buy or lease my next car?
   ·Which equipment should be selected for a new assembly line?
   ·Which materials should be used as roofing, siding, and structural support for a new building?
   ·Shall I buy a 1- or 2-semester parking pass?
   · Which printing press should be purchased? A low-cost press requiring three operators, or a                     moreexpensive one needing only two operators?

Complex Problems
At theupperendofourclassificationsystemwediscoverproblemsthatareindeedcomplex.

Theyrepresentamixtureof economic,political,anqhumanistic elements.

   ·The decision of Mercedes-Benz to build an automobile assemblyplant in Thscaloosa, Alabama, illustrates a complex problem. Beside the economic aspects, Mercedes-Benz had to consider possible reactions in the American auto industry.Would the German government pass legislationto prevent the overseasplant?What about German labor unions?
   ·The selection of a girlfriend or a boyfriend (who may later become a spouse) is obviously complex. Economic analysis can be of little or no help.
   ·The annual budget of a corporation is an allocation of resources, but the budget process is heavily influenced by noneconomic forces such as power struggles, geographical balancing, and impact on individuals, programs, and profits. For multinational corporations there are even national interests to be considered.

Making Economic Decisions: Could the World Trade Center Have Withstood the 9/11 Attacks?

In the immediate after math of the terrorist attacks of September II, 200I, most commentators assumed that no structure, however well built, could have withstood the damage inflicted by fully fueled passenger jets traveling at top speed.

But questions soon began to be raised. Investigators scrutinizing the towers' collapse noted that they had withstood the initial impact with amazing resiliency. What brought them down was the fires that followed.

Knowledgeable investigators noted that the rapid progress of the Twin Towers' fires showed similarities with earlier high-rise blazes that had resulted frommore mundane causes, suggesting that better fire prevention measures could have saved the ,buildingsfrom crumbling.

In spring 2002, a report drafted by the Federal EmergencyManagement Agency and the American Society of Civil Engineers suggested that the light, fluffy spray-applied fireproofing used throughout the towers might have been particularly vulnerable to damage from an impact or bomb blast. Sturdier material had been available, but it would have added significantweight to the building.

This book is about making decisions. Decision making is a broad topic, for it is a major aspect of everyday human existence. This book develops the tools to properly analyze and solve the economic problems that are commorny faced by engineers. Even very complex situations can be broken down into components from which sensible solutions are produced. If one understands the decision-making process and has tools for obtaining realistic comparisons between alternatives, one can expect to make better decisions.

Although we will focus on solving problems that confront firms in the marketplace, we will also use examples of how these techniques may be applied to the problems faced in daily life. Since decisionmaking or problem solving is our objective, let us start by looking at some problems.