- This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.
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The direct labour cost per unit has been based on an expected learning rate of 90% but now the finance director has realised that a 95% learning rate should be applied.
Which of the following statements is true?
A The target cost will decrease and the cost gap will increase
B The target cost will increase and the cost gap will decrease
C The target cost will remain the same and the cost gap will increase
D The target cost will remain the same and the cost gap will decrease
I understand the concept behind why the target cost will remain the same but I need you to explain to me why will the cost gap increase? (The answer is C)
The higher the learning rate, the slower the learning is (if the learning rate was 100% then it would mean they were not ever getting any faster).
So with a higher learning rate, the time per unit will be higher and therefore the cost per unit will be higher. This will mean a higher cost gap.
Oh okay I get it, it actually means vice versa. Got it, thanks John!
You are welcome 🙂