Question

Harper Ltd is a manufacturer of rowing boats. It has designed a new boat called the Seafarer and expects to produce the Seafarer in a continuous operation over an 18 month period. During this period, it is expected that a total of sixteen Seafarer’s will be produced and sold. The production of the Seafarer is a labour intensive operation and units are produced one after another.

The costs of producing the first Seafarer are as follows:

Skilled Labour – 1,000 hours at a rate of £40 per hour

Unskilled Labour – 2,000 hours at a rate of £20 per hour

Materials – £25,000

Overheads – £20 per labour hour worked (total of Skilled and Unskilled labour hours)

It is known that in producing any product, Skilled Labour usage experiences a 75% learning curve effect and Unskilled Labour usage experiences a 80% learning curve effect.

Harper Ltd has decided to set the selling price per unit of the Seafarer by using the full cost plus method of pricing, with a profit mark up of 20%

Required:

(a) Using the cumulative average time model, calculate the minimum selling price of

(i) the first unit of the Seafarer.

(ii) the second unit of the Seafarer

(iii) the first 16 units of the Seafarer if ordered together

(b) Identify the method of setting the selling price that Harper Ltd has chosen. Explain how the learning curve model will affect the calculations for that selling price.

(c) Harper Ltd also produce a further rowing boat, the Rower, which has been in production for a number of years, and to date 352 units of the Rower have been produced. The budget for the next quarter is showing the production of 50 units of the Rower. If the 1st ever unit took 100 hours and an 80% learning curve applies:

(i) calculate the total labours hours needed for the production of the 50 units of the Rower

(ii) calculate the average labour time per unit

(iii) explain where this information may be used by Harper Ltd Note: the learning co-efficient of 80% is -0.322

Answer 1

a). i).Selling price of first unit of Powerline 3 :
Skilled labour cost = 1000 hrs * 40 = 40000
Unskilled labour cost = 2000 hrs*20 = 40000
Materials = 25000
Overhead = (1000+2000) * 20 = 60000
Total Cost = 165000
Add: Profit margin 20% = 165000 * 20% = 33000
Selling Price = 198000

ii). Selling Price of second unit.:
Skilled labour hrs per unit = 1000 hrs * 75% learning curve = 750 hrs
Total skilled hrs = 750 * 2 = 1500 hrs
Unskilled labour hrs per unit = 2000 hrs * 80% learning curve = 1600 hrs
Total unskilled hrs = 1600 * 2 = 3200 hrs

Calculation of cost of 2 units of product:
Skilled labour cost = 1500 hrs * 40 = 60000
Unskilled labour cost = 3200 hrs *20 = 64000
Materials = 25000 * 2 = 50000
Overhead = (1500+3200) * 20 = 94000
Total Cost of producting 2 units = 268000
Less: Cost of first unit = 198000
Cost of Second Unit = 70000
Add: Profit Margin 20% = 70000*20% = 14000
Selling price for Second Unit = 70000+14000 = 84000

iii). Selling price of 16 units:

Calculation of Hrs per unit as per learning effect.

Calculation of cost of 16 units:
Skilled labour cost = 316.41 * 16 * 40 = 202,502.4
Unskilled labour cost = 819.20 * 16 * 20 = 262,144
Material cost = 25000 * 16 = 400,000
Overhead = (316.41 + 819.20)*16 * 20 = 363,395.2
Total Cost = 1,228,041.6
Cost per unit = 1,228,041.6 / 16 = 76,752.6
Add: Margin 20% = 15350.52
Selling Price = 92103.12

b). Company has chosen the cost plus markup method for setting the selling price. Due to Learning curve in skilled and unskilled labour. Labour hrs for producing double units is reduced by learning curve effect of which calculation is shown in iii) part of (a). Due to decrease in labour hrs labour cost also reduces for every unit more produced thus reducing the cost of producing another unit.