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Production and development on same server

We are currently in an upgrade activity from 3.1i to 46c. Our team would just like to ask you regarding different...

landscapes for the production and development server. Would there be an issue if both the production and the development client resides in one server? Also, what would you suggest as the best way of configuring the hardware landscape if budget is an issue.

I strongly recommend to not use the same server for both production and development clients. A change in the development client can really cripple your production system. Also, users' processes would have to compete against development tasks and processes. Definitely, not recommended at all.

Dev/Customizing and testing or Quality Assurance on one single box is more acceptable. In fact, there are many companies who only count on two systems:
DEV/Cust/Training and Production.

Since I don't know how large your systems are right now and what SAP modules you are using, I can only refer you to these SAPNet notes for now:

178616 Resource Requirements for Release 4.6 B
85524 R/3 Sizing (Quick Sizer)
323263 Resource Requirements for Release 4.6 C SR1

You might to check http://service.sap.com/quicksizing too.

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