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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
    Fixed overhead**
    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
    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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