Reference no: EM132958818

Question - Weston plc has recently developed a new product called PRG250, which has been in production for the past year. The plant producing PRG250 is shut down for routine inspection and maintenance every three months, and during the first year's operation the costs of shut-down have been as follows.

Quarter and Shut-down cost (€ 000's)

1 8.0

2 6.4

3 6.0

4 5.6

The accountant is attempting to forecast maintenance costs for the year after next and, on examining the above data; it appears that these costs have been steadily decreasing. The plant engineer has suggested that this is probably due to the fact that the plant itself is gradually settling down after initial operational problems. If this is the case, an appropriate learning curve could explain the situation which has been observed.

Required -

(a) Estimate the learning rate which is suggested in the data. (Note: the average decline from one period to the next reflects the learning rate i.e. average of €8,000 in period one and €6,400 in period 2).

(b) Using the learning curve you have determined to calculate the shut-down maintenance costs for the year after next (i.e. 2 years' time).

(c) Critically evaluate the learning curve methodology, outlining its benefits and limitations to management.