Question

Champions Ltd is a manufacturer of rowing boats. It has designed a new boat called the Drifter 25 and expects to produce the Drifter 25 in a continuous operation over an 18 month period. During this period, it is expected that a total of sixteen Drifter 25’s will be produced and sold. The production of the Drifter 25 is a labour intensive operation and units are produced one after another.

The costs of producing the first Drifter 25 are as follows: Skilled Labour – 1,000 hours at a rate of £50 per hour ,Unskilled Labour – 2,000 hours at a rate of £30 per hour, Materials – £15,000 , Overheads – £15 per labour hour worked (total of Skilled and Unskilled)
  It is known that in producing any product, Skilled Labour usage experiences an 80% learning curve effect and Unskilled Labour usage experiences a 90% learning curve effect.

Champions Ltd has decided to set the selling price per unit of the Drifter 25 by using the full cost plus method of pricing, with a profit mark up of 30%

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

(i) the first unit of the Drifter 25. (ii) the second unit of the Drifter 25 (iii) the first 16 units of the Drifter 25 if ordered together   

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

(c) Champions Ltd also produce a further rowing boat Splash, which has been in production for a number of years, and to date 355 units of splash have been produced. The budget for the next quarter is showing the production of 40 units of Splash. If the 1st ever unit took 100 hours and an 80% learning curve applies, calculate.   
(i) the total labours hours needed for the production of the 40 units of Splash  
(ii) the average labour time per unit
(iii) explain where this information may be used by Champions Ltd
Note: the learning co-efficient of 80% is -0.322

Answer 1