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3 Cards in this Set
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Proper Propeller, Inc., plans to manufacture a newly designed high-technology propeller for airplanes. Proper Propeller forecasts that as workers gain experience, they will need less time to complete the job. Based on prior experience, Proper Propeller estimates a 70% cumulative learning curve and has projected the following costs:Cumulative NumberManufacturing Projectionsof Units ProducedAverage Cost per UnitTotal Costs1$20,000$20,000214,00028,000
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Learning curve analysis is used to project productivity gains resulting from the increased rate at which people perform tasks as they gain experience. The underlying assumption of learning curve analysis is that workers gain productivity at a predictable rate as they gain experience with a new process. In this situation, the company is assuming that the total costs required for each doubling of output will be 70% of the costs required for the previous doubling. The effects of Proper Propeller’s projected learning curve can be calculated as follows:CumulativeCumulativeCumulativeUnitsAverageTotalBatchProducedCostCost11$20,000$20,00022$14,000 ($20,000 × 70%)28,00034$9,800 ($14,000 × 70%)39,20048$6,860 ($9,800 × 70%)54,880
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For cost estimation, simple regression differs from multiple regression in that simple regression uses only |
Simple regression uses the algebraic formula for a straight line, y = a + bx, where x is the independent variable. Multiple regression is used when there is more than one independent variable. Multiple regression allows a firm to identify many factors (independent variables) and to weight each one according to its influences on the overall outcome (y = a + b1x1 + b2x2 + b3x3 + etc.). Both methods use only one dependent variable. |
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Moss Point Manufacturing recently completed and sold an order of 50 units that had costs as shown in the next column.The company has now been requested to prepare a bid for 150 units of the same product.Direct materials $ 1,500Direct labor ($8.50 × 1,000 hours)8,500Variable overhead (1,000 hours × $4.00)* 4,000Fixed overhead**1,400$15,400*Applied on the basis of direct labor hours.**Applied at the rate of 10% of variable cost.
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Assuming that the cumulative average time model applies, an 80% learning curve means that the cumulative average time per unit (and labor cost, given a constant labor rate) declines by 20% each time unit output doubles in the early stages of production. The first lot size was 50 units, which was produced at a total cost of $15,400 ($1,500 for materials and $13,900 for labor and overhead). Materials costs are strictly variable and should remain proportional to production. The labor ($8,500) and variable overhead ($4,000) costs (labor-related), however, will be affected by the learning curve. The average cost per lot for labor and variable overhead after 100 units have been produced should be 80% of the costs of the first lot of 50 units. Thus, the average labor and variable overhead cost per 50-unit lot will be $10,000 ($12,500 × 80%). If production doubles again (to a total production of 200 units or four lots of 50 each), the cumulative average cost for labor and variable overhead will be $8,000 per lot ($10,000 × 80%). Given four lots of 50 each, at an average cost of $8,000 per lot, the total cost for labor and variable overhead must be $32,000. Adding $6,000 for raw materials ($1,500 per 50-unit lot) gives a total variable cost of $38,000 for 200 units. Fixed overhead is 10% of total variable cost, so total cost is $41,800. The total cost for the last 150 units is $26,400 ($41,800 – $15,400).
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