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## Study Unit 12: Analysis, Forecasting, and Strategy | Subunit 2: Learning Curve Analysi HELP

• #### 1.  Study Unit 12: Analysis, Forecasting, and Strategy | Subunit 2: Learning Curve Analysi HELP

Posted 25 days ago
Study Unit 12: Analysis, Forecasting, and Strategy | Subunit 2: Learning Curve Analysis

Fact Pattern:
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
\$  1,500
Direct labor (\$8.50 × 1,000 hours)
8,500
Variable overhead (1,000 hours × \$4.00)*
4,000
1,400
\$15,400
*Applied on the basis of direct labor hours.
**Applied at the rate of 10% of variable cost.

Question5 If an 80% learning curve is applicable, Moss Point's total cost on this order would be estimated at
 A. \$38,000 B. \$26,400 Answer (B) is correct.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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Tayba Al-Mehdar
Controller
Khobar
Saudi Arabia
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