ESTIMATING PRICES USING LEARNING RATES
A buyer has placed an order with a supplier for 100 pieces at a per-unit price of $281 and has collected the following cost data:
Material $100 Direct labor $50 (5 hours at $10 per hour) Overhead $75 (150% of direct labor) Total costs $225 Profit (25%) $56
Total per unit $281
The buyer now wants to place an order for an additional 700 pieces.
Assignment Questions 1. What do you estimate the buyer should pay per unit for the next 700 pieces assuming the supplier demonstrates a 75% learning curve? What if the learning rate is actually 85%? What do you estimate is the per unit cost of the next 700 pieces?
2. Under what conditions can we use learning curves to estimate prices? In other words, when does the learning curve apply?
3. Why can we use rough estimates when applying learning curves?
4. Why do manual processes experience greater learning curves than automated processes? 5. Are there factors besides learning that can help reduce costs as volume increases?