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Hello sir can you please help me in the below question.
BL is planning to manufacture a new product, product A. Development tests suggest that 60% of the variable manufacturing cost of product A will be affected by a learning and experience curve.
This learning effect will apply to each unit produced and continue at a constant rate of learning until cumulative production reaches 4,000 units, when learning will stop. The unit variable manufacturing cost of the first unit is estimated to be $1,200 (of which 60% will be subject to the effect of learning), while the average unit variable manufacturing cost of four units will be $405.
Calculate the rate of learning expected.
Sir in the above question i wanted to ask that. How should i determine whether the Average unit variable manufacturing cost of four units i.e. $405 given above.
Is the Cumulative Average Cost of 4 units (i.e. 60% Cost upon which learning effect has been applied).
Or is it the Cumulative Average Cost of 4 units of which 60% will be subject to effect of learning.
Where did you find this question? Because as it is written it doesn’t actually make any sense.
The reason is that it is only the labour cost that is subject to learning and for the first unit it is 60% x $1,200 = $720.
The remainder of the manufacturing cost for the first unit is therefore $480, and this is not subject to learning and will remain constant per unit.
It is therefore impossible for the average variable manufacturing cost per unit to be $405 when they make 4 units. The variable cost must always be $480 plus the labour cost.
Sir it is one of the question in B.PP Study Text.
The answer is as follows.
Cumulative Production. =1, 2, 4
Cumulative Average cost =720, 720*LR, 720* LR².$720*LR² = $405
LR.= 0.75 or 75%.I understood the working.
I’m just a bit confused that as the question has simply stated $405 as “Average unit variable manufacturing cost of 4 units”.So is it an assumption that whenever we have been simply given Average Labour time or Average Labour Cost for x units.
This is to be taken as Cumulative Average Labour Time or Cumulative Average Labour cost for x unitsThe question is terribly badly worded, and the answer has assumed that $405 is the average labour cost (in which case the answer is correct).
However this is not what the question says – it says that $405 is the average variable manufacturing cost (and labour is only part of the cost).
It is a fault of BPP, but do not worry for the real exam – questions in the real exam will be worded correctly and you will not need to make assumptions 🙂
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