Question

2. You are a logistics manager for Huntsville Logistics, Inc. and you place an order with a supplier for 250 units of a product. The supplier shares with you her cost structure which is as follows: Material cost = $30 per unit, Labor cost = $40 per unit, Overhead cost = 40% of the labor and material cost, profit is added as 20 % of the above three costs. Calculate total cost. You realize later on that you need another 800 units of the same product and therefore order another 900 units. The supplier also shares with you that her production learning curve is 92% and is willing to charge less than what you paid per unit for the previous order. a. Based on your knowledge of learning curves, how much will you pay to the supplier per unit?

Answer 1

a.

Statement showing total cost without learning effect

Materials cost p u	30
labor cost	40
Total prime cost	70
Add: Overhead cost @ 40%	28
Total cost	98
Total cost for 250 units	24500

Note Assuming learning effect is both on material cost and labor cost

Statement showing total cost with learning effect

Materials cost p u(30*92%)	27.6
labor cost(40*92%)	36.8
Total prime cost	64.4
Add: Overhead cost @ 40%	25.76
Total cost	90.2
Total cost for 900 units	81180

b. Amount save as compare to 1st order = pu cost in 1st order - pu cost in 2nd order

= (98-90.2) =$7.8 Per unit

or

Note Assuming learning effect is on labor cost only.

Statement showing total cost with learning effect

Materials cost p u	30
labor cost(40*92%)	36.8
Total prime cost	66.8
Add: Overhead cost @ 40%	26.72
Total cost	93.52
Total cost for 900 units	84168

b. Amount save as compare to 1st order = pu cost in 1st order - pu cost in 2nd order

= (98-93.52) =$4.48 Per unit