Question

Andrews & Henderson Inc. is a manufacturer of mining equipment in Colorado. Eric Andrews, the founder of the corporation, has just won a new contract from Shakley Inc. to build seven new tunneling machines for a price of $500,000 each. The machines are to be delivered in the next seven months. The costs associated with the production of the first machine are listed below. Eric estimates that an 85% cumulative average learning rate exists for these types of projects.

Following is the cost information for the first tunneling machine:

Direct Materials:	$150,000
Direct Labor (8,500 hours @ $50)	$425,000
Variable Overhead (8,500 @ $10)	$85,000

Required:

(1) Prepare an estimate of the total hours for producing the second through eighth machines.
(2) Determine the expected profit from this project.

Answer 1

1.

x	Cumulative average labour hours per machine (c)	Cumulative total labour hours (c*x)
1	8,500	8,500
2	7,225 (8,500*85%)	14,450
4	6,141.25 (7,225*85%)	24,565
8	5,220.0625 (6,141.25*85%)	41,760.5

Estimated total hours for producing the second through eighth machines = Total hours - Hours for first machine

= 41,760.5 - 8,500

= 33,260.5

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2.

Revenues (8 * 500,000)	4,000,000
Direct labour (41,760.5 * 50)	(2,088,025)
Variable overhead (41,760.5 * 10)	(417,605)
Expected profit	1,494,370