The average labor cost per unit for the first batch produced by a new process is US $120. The cumulative average labor cost after the second batch is US $72 per product. Using a batch size of 100 and assuming the learning curve continues, the total labor cost of four batches will be:
- US$4,320
- US$10,368
- US$2,592
- US$17,280
Answer(s): D
Explanation:
The learning curve reflects the increased rate at which people perform tasks as they gain experience. The time required to perform a given task becomes progressively shorter. Ordinarily, the curve is expressed in a percentage of reduced time to complete a task for each doubling of cumulative production. One common assumption in a learning curve model is that the cumulative average time (and labor cost) per unit is reduced by a certain percentage each time production doubles. Given a US $120 cost per unit for the first 100 units and a US $72 cost per unit when cumulative production doubled to 200 units, the learning curve percentage must be 60% (US $72 + $120). If production is again doubled to 400 units (four batches), the average unit labor cost should be US $43.20 ($72 x 60%). Hence, total labor cost for 400 units is estimated to be US $17,280 (400 units x $43.20).