Reference no: EM132707996

Question - The following worked example illustrates that the benefit of the learning curve relates to labor and labor-related costs, but not to the cost of materials.

A company wishes to determine the minimum price it should charge a customer for a special order. The customer has requested for a quotation for ten welding equipments; he might subsequently place an order for a further ten equipments. Material costs are $80 per equipment. It is estimated that the first batch of ten equipments will take 120 hours to manufacture and a 90% learning curve is expected to apply. Labor rate is at $4 per labor hour. The variable overhead is at 150% of labor cost. Setting-up costs are $500 regardless of the number of equipment made.

Required -

a) What is the minimum price the company should quote for the initial order if there is no guarantee of further orders?

b) What is the minimum price for the follow-on order?

c) What would be the minimum price if both orders were placed together?

d) Having completed the initial orders for a total of twenty equipments (price at the minimum levels recommended in (a) and (b), the company thinks that there would be a ready market for this type of equipment if it brought the unit selling price down to $165. At this price, what would be the profit on the first 300 'mass-production' models (i.e. after the first twenty equipment) assuming that marketing costs total-up to $485?