Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 57

Learning Curves Emotional Headdress (EH) is a Des Moines, Iowa, manufacturer of avant garde hats and headwear. On March 11, 2010, the company purchased a new machine to aid in producing various established product lines. Production efficiency on the new machine increases with the workforce experience. It has been shown that as cumulative output on the new machine increases, average labor time per unit decreases up to the production of at least 3,200 units. As EH’s cumulative output doubles from a base of 100 units produced, the average labor time per unit declines by 15 percent. EH’s production varies little from month to month and averages 800 hats per month.

Emotional Headdress has developed a new style of men’s hat, the Morrisey, to be produced on the new machine. One hundred Morrisey hats can be produced in a total of 25 labor-hours. All other direct costs to produce each Morrisey hat are $16.25, excluding direct labor cost. EH’s direct labor cost per hour is $15. Fixed costs are $8,000 per month, and EH has the capacity to produce 3,200 hats per month.

Required Emotional Headdress wishes to set the selling price for a Morrisey hat at 125 percent of the hat production cost. At the production level of 100 units, what is the selling price?

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Learning Curve:

Learning curve is the analysis of recurring cost the show relation among cost and output over a period of time, in case of repetitive tasks of a worker or employee. This theory is generally used in production process or assembly process, where a worker is doing the same job again and again. When a worker does the same job again and again, gradually the time taken by the worker per unit of work will reduce, such reduction is called learning curve effect.