Skip to content

Ask the Tutor ACCA PM

Calculation of rate of learning (Unlike before) and optimal pricing !

MMajestic11y ago
The Q organisation is a large worldwide respected manufacturer of electronic goods. Q constantly develops new products that are in high demand. Market research has discovered that the price-demand relationship for a new DVD recorder product during the initial launch phase will be as follows: Price($) Demand(units) 100 10,000 80 20,000 69 30,000 62 40,000 Production of the DVD recorder would occur in batches of 10,000 units and the production director believes that 50% of the variable manufacturing cost would be affected by a learning curve. This would apply to each batch produced and continue at a constant rate of learning up to a production volume of 40,000 units when the learning would be complete. The production director estimates that the unit variable manufacturing cost of the first batch would be 60$( $30 of which is subject to the effect of learning curve, and $30 of which is unaffected), whereas the average unit variable manufacturing cost of all four batches would be $52.71. There are no non-manufacturing variable costs associated with the DVD recorder. Required (a). Calculate the rate of learning that is expected by the production director. (2marks) (b). Calculate the optimum price at which Q should sell the DVD recorder in order to maximise its profits during the initial launch phase of the product. (8marks) I can't make out to the suggested answer to this question.. That's why i have posted this question here as i want your fine guidance on this question. Cheers : )
John MoffatJohn MoffatTutor11y ago#1
Every time you double production, the average time (and therefore cost) falls to the same fixed percentage of the previous average time. So cost for first = 30 If learning rate is r, then average cost when we make 2 is 30 x r Then average cost we we make 4 is (30 x r) x r = 30 x r^2 and we know that this equals 52.71 - 30 = 22.71 (because 30 is unaffected by learning). So 30 r^2 = 22.71. You should then be able to calculate r without problem,/ For (b) the only way is to calculate the total profit for each of the 4 possible selling prices. Whichever gives the highest profit is the best.
MMajestic11y ago#2
Thank you So much Sir : )
John MoffatJohn MoffatTutor11y ago#3
You are welcome :-)
Sign into reply to this topic.