At the time of writing, Burt Rutan and Sir Rich- ard Branson had teamed up to form The Space- ship Company, which will develop and manu- facture commercial spacecraft (SpaceShipTwo, or SS2), launch aircraft (WhiteKnightTwo, or WK2), and support equipment. Branson s spaceline, Virgin Galactic, will handle the operations for space tourist flights. Their hope is to eventually reduce by half the proposed initial ticket price of $190,000. No information has been released about development and operating costs for the spaceline and equipment, so the figures used in this case are QUESTIONS 1. Assuming all other numbers from Example 8.2 are the same, what is the bottom line profit of the venture for 5 years of operation? 2. If the profit goal is $70 million: a. What is the maximum development and production cost for the fleet? b. What is the maximum per-flight opera- tional cost (note: assume $120 million development/production cost)? guesses. Refer to Example 8.2 for hypothetical life cycle costs for the spaceline and spaceship fleet, but assume the following changes to the numbers: Five spaceships, seven passengers per spaceship Development and manufacturing costs, $120 million Flight operations cost: $0.5 million/flight Ticket price: $190,000 for passengers on the first 100 flights, then $150,000 for passengers on the next 100, and $100,000 for passengers on flights thereafter. 3. Brainstorm. What are some ways that the development cost might be reduced? What are some possible design decisions for the spacecraft and mothership that would reduce the per-flight operational cost? Next, research articles and news releases about SS2 and WK2 to see what the developers, Scaled Compos- ites and The Spaceship Company, have been doing to contain costs. BOOKMARKS ing costs, and making design trade-off decisions to achieve those targets. Example 8.2 provides an illustration. Example 8.2: Life Cycle Costs for an Operational Fleet of Spaceships (This illustration extends on previous SpaceShipOne examples, but the numbers are purely hypothetical.) Having gained experience from SpaceShipOne, a larger spaceship and moth- ership are to be designed. The new spaceship will carry a pilot plus four paying passengers, go as high as 120 km, and be capable of 20 flights per year over an operational life of 5 years. The cost of developing and producing four of these spaceships and two motherships is estimated at $80 million. Meantime, a survey indicates that the number of people worldwide willing to pay the $190,000 ticket price to fly on these spaceships is at least 1,000 per year. A spaceline that will use and maintain the spaceships is being created for a start-up cost of $10 million. Operational costs for the spaceline comprise two parts: annual costs for ground operations (reservations, personnel, ground facili- ties, etc.), and per-flight costs for flight operations (fuel, parts, repairs, etc., for the spaceship and the mothership). Ground operations costs are placed at $2 million/year, and per-flight costs at $0.4 million/flight. (These costs are assumed to be constant for every year and flight, respectively, although realistically they would vary up or down on depending on inflation, the learning curve, efficiencies, and economies of scale as more spaceships are added to the fleet. Annual rev- enues are assumed constant too, though realistically they would start out small and then grow until the full fleet of spaceships is operational). Given these costs and ignoring other factors (e.g., time value of money), what is the LCC for the venture? Assumptions Four spaceships @ 20 flights/year each = 80 flights/year (320 passengers/year, which lies well within the estimated annual demand). Five years of operation. Chapter 8 Cost Estimating and Budgeting 289 BOOKMARKS Costs Development and manufacturing: $80 million. Spaceline start-up: $10 million. Ground operations: $2 million/year. Flight operations: $0.4 million/flight. Ticket price: $190,000 (marketing slogan: Now YOU can go to space for under $200,0001 ). LCC Model LCC ($ million) Development & production cost +Start-up cost+Operating cost (5 years) = $80+$10+ ([5yx$2] + [5yx80 flights x $0.41) = $260 million Total revenues ($ million)=(5yx 80 flightsx4 passengers x $0.190) =$304 million Bottom line: Assuming the assumptions are correct, revenues will exceed costs by $44 million. All the numbers are estimates, but some are more certain than others. For example, based upon experience with SpaceShipOne, the development cost might be fairly certain, but due to lack of long-term operational experience the per-flight. cost is fairly uncertain. Start-up and ground operations costs, if analogous to airline operations, might be somewhat certain, although passenger demand might be fairly uncertain. The LCC model plays an important role in system design and development. Based on the model, sensitivity analysis can be performed to see what happens. when costs increase or decrease to show best case, most likely, and worst case scenarios. The model can also be used to determine by how much and in what combination the costs must vary such that the enterprise becomes lucrative (or disastrous). The LCC model is also used to set cost targets. If the decision is made to proceed with the $80 million development and production cost, then the project must be planned, budgeted, and controlled so as stay close to that amount. If the per-flight cost is set at $0.4 million, the project must strive to develop vehicles that will cost no more than that to operate. This will affect innumerable design decisions pertaining to many details. Early on, the design analysis must consider major alternatives (e.g., to carry five or six passengers, not four), and the expected costs, revenues, and benefits for each. The best and only truly comprehensive approach to estimating and analyzing LCC is with a team of people that represents all phases of the system development cycle a cross-functional team of designers, builders, suppliers, and users, i.e., a concurrent engineering team. Concurrent engineering for LCC is further discussed in Chapter 13. methods, a target or the estimate will not estimate can be comp schedules, etc., revis never be a simple pl Accuracy versus Accuracy represe accuracy of a $99,00 In contrast, precisic of $75,321 is more p cost is $100,000). Ac- accurate estimate po Sometimes accu mate, which combine to arrive at an expec ing expected time: Classifying Wor The cost estimating such as design, deve The project team, inc meets to discuss the The team looks standard practices a or as an adaptation. Developmental wor estimating is more work, which is stra labor costs for simil. mon, especially due use of existing desig Estimated costs happen more than c quality assurance an with development, f special items. In a pure project 11