Question

EBC is a construction company. They are in the process of constructing a building whose plumbing would be installed in 12 days at a cost of $ 64 or in 10 days at a cost of $ 80 by working overtime. Plumbing is on the critical path and each day’s saving in completion time of the whole project is worth $ 10.

a) You have been asked to advise the project team on whether to take the 10 day or the 12-day option. Using relevant computation, present your piece of advice.

b) Highlight the elements of ‘trade-off’ expressed in the above case.

c) Assume each day’s saving in completion time is worth $ 5. What advice would you give? Give reasons for your answer

Answer 1

a. If we take the 12th-day option then it would cost us = $64

If we take the 10th-day option then it would cost us = $80

But there is an opportunity cost associated with the options i.e. for each day saving is $10

That means the cost of 10th-day option will be = $80 - $10*2 = $60

Hence, it is advised to take the 10th-day option

b. The trade-off is, for each day reduced in completion of plumbing there is a saving of $10 in the project. Hence this has to be reduced from the cost to find out the effective cost.

c. If the oppurtunity cost = $5 per day

Then, 10th-day effective cost = $80 - $5*2 = $70

As 10th-day effective cost is more than the 12th-day cost, so it would be advisable to take the 12th-day option.