Estimating Models 45
Equation 2-2 states that the ratio of the cost index numbers at two points in time(A
andB)is equivalent to the dollar cost ratio of the item at the same times (see Example 2-7).
Miriam is interested in estimating the annuallabQrand materialcosts for a new production facility.
She was able to obtain the following labor and material cost data:
Labor costs
· Lapor cost index value was at 124 ten years ago and is 188 today.
·Annual labor costs for a similarfacility were $575,500 ten years ago.
Material Costs
·Material cost index value was at 544 three years ago and is 715 today.
·AJ;:inualmaterialcosts for a similar facility were$2,455,OPQthJ;eeyears ago.
--'J!i!-~ ...., .. _. .. : h ,-,..
Miriam will use Equation 2,.2to develop her cost estimat~s for;annual.labor and material costs.
Labor
"
Annual cost today _ Index value today
Annual cost 10 years ago Index value 10 years ago
188.
II Annual cost today 124 x $575,500 $871,800
lv.{aterial~
Annual cost today Index value today
Annual cost 3 years ago - Index value 3 years ago
- J
;:;:;;;:=- - :;;::..:::!:!J:" =:;;;; ;; ..~11lWJll C.Qst..!op~y';_521-~~J,#~.,2,PQO.-:=...$3,221,-..OOO :;;~ 4 ='=... =
Cost index data are collected and published by several private and public sources in
the United States (and world). The U.S. government publishes data through the Bureau of
Labor Statistics of the Department of Commerce. TheStatistical Abstract of the United-
Statespublishes cost indexes for labor, construction, and materials. Another useful source
for engineering cost index data is theEngineering News Record.
Power-Sizing Model
The power-sizingmodel is used to estimatethe costs of industrialplants and equipment.
The model"scalesup" or "scalesdown"knowncosts,therebyaccountingfor economiesof
