BFG Limited is investigating the financial viability of a new product the S-pro. The S-pro is a short-life product for which
a market has been identified at an agreed design specification. The product will only have a life of 12 months.
The following estimated information is available in respect of S-pro:
1. Sales should be 120,000 in the year in batches of 100 units. An average selling price of $1,050 per batch of 100
units is expected. All sales are for cash.
2. An 80% learning curve will apply for the first 700 batches after which a steady state production time will apply,
with the labour time per batch after the first 700 batches being equal to the time for the 700th batch. The cost of
the first batch was measured at $2,500. This was for 500 hours at $5 per hour.
3. Variable overhead is estimated at $2 per labour hour.
4. Direct material will be $500 per batch of S-pro for the first 200 batches produced. The second 200 batches will
cost 90% of the cost per batch of the first 200 batches. All batches from then on will cost 90% of the batch cost
for each of the second 200 batches. All purchases are made for cash
5. S-pro will require additional space to be rented. These directly attributable fixed costs will be $15,000 per
month.
A target net cash flow of $130,000 is required in order for this project to be acceptable.
Note: The learning curve formula is given on the formulae sheet. At the learning rate of 0.8 (80%), the learning
factor (b) is equal to -0.3219.
this is the answer :
For first seven hundred batches y = axb
y = 2,500 x 700 –0.3219
y = $303.461045
Why they use 2500 for first total hour? Should it be 500 hours?
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BFG Limited Question ( Learning Curve )
2y ago#1This was for 500 hours at $5 per hour.
It doesn't matter when you * $5 but you have to.
i still dont understand? Why they used $2500 but not 500 hours?
This is my working
Y = (500) (700) ^ -0.3219
I dont get the same answers like the book
2y ago#3The question asks you to:
Prepare detailed calculations to show whether product S-pro will provide the target net cash flow.
Therefore you have to work out the labour cost as well as materials etc
Therefore what you have done is right BUT you need to multiply by labour cost $5
You have to value it
So its got to be * $5
y = axb
y = 500 x5 x 700^ –0.3219
y = $303.461045
Total cost for first 700 batches = $303.461045 x 700 = $212,423
All batches after the first 700 will have the same cost as the 700th batch.
To calculate the cost of the 700th batch we need to take the cost of 699 batches from the cost of 700 batches.
For 699 batches
y = a x b
y = 500 x 5 x 699 ^–0.3219
y = $303.600726
Total cost for first 699 batches = $303.600726 x 699 = $212,217
Cost of 700th batch is $212,423 - $212,217 = $206
Total cost for the 12 months of production $212,423 + ($206 x 500) = $315,423
This is clear now Thanks
Can you also explain how they calculated for variable overheads
2y ago#6Total labour cost ($212,423 + $103,000) = $315,423
Variable overhead = 126,169
Variable overhead is $2 per labour hour, or 40% of the direct labour cost which is 2/5
$2 var o/h compared to $5 labour costs
$315,423 * $2 / $5
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