Question

Harper Ltd is a manufacturer of rowing boats. It has designed a new boat called the Seafarer and expects to produce the Seafarer in a continuous operation over an 18 month period During this period, it is expected that a total of sixteen Seafarer's will be produced and sold. The production of the Seafarer is a labour intensive operation and units are produced one after another The costs of producing the first Seafarer are as follows Skilled Labour 1,000 hours at a rate of £40 per hour Unskilled Labour 2,000 hours at a rate of £20 per hour Materials £25,000 Overheads - £20 per labour hour worked (total of Skilled and Unskilled labour hours) It is known that in producing any product, Skilled Labour usage experiences a 75% learning curve effect and Unskilled Labour usage experiences a 80% learning curve effect. Harper Ltd has decided to set the selling price per unit of the Seafarer by using the full cost plus method of pricing, with a profit mark up of 20% Required (a) Using the cumulative average time model, calculate the minimum selling price of (i) the first unit of the Seafarer (ii) the second unit of the Seafarer (iii) the first 16 units of the Seafarer if ordered together (35 marks) (b) Identify the method of setting the selling price that Harper Ltd has chosen Explain how the learning curve model will affect the calculations for that selling price (10 marks) (c) Harper Ltd also produce a further rowing boat, the Rower, which has been in production for a number of years, and to date 352 units of the Rower have been produced. The budget for the next quarter is showing the production of 50 units of the Rower. If the 1st ever unit took 100 hours and an 80% learning curve applies (i) calculate the total labours hours needed for the production of the 50 units of the Rower (ii) calculate the average labour time per unit (ii) explain where this information may be used by Harper Ltd Note: the learning co-efficient of 80% is-0322 (15 marks)

Answer 1

a. Skilled labour-learning curve 75%. Statement of learning curve Average time Total time per unit 1000 unit 750 unit 562.5 unit 421.88 unit 316.41 unit Incremental time 1000 500 750 1125 1687.5 Cumulative production 1000 H 1500 H 2250 H 3375 H 5061 H On 2nd unit On next 2 units On next 4 units On next 8 units 16 Unskilled labour-learning curve 80%. statement of learning curve Cumulative roduction Average time Total time er unit 2000 1600 1280 1024 819.20 2000 H 3200 H 5120H 8192 H 13107.2H Incremental time 2000 1200 1920 3072 4915.2 On 2nd unit On next 2 units On next 4 units On next 8 units 16 Statement of hours worked Time required Skilled Unskilled Total 1st unit 1000 2000 3000 2nd unit 1500 3200 4700 16 units 5062.5 13107.2 18169.7

Statement of minimum price 1st unit seafarer 25000 2nd unit seafarer 16 unit seafarer 400000 Direct material (25,000 per unit Skilled (total time40000 #40 per hour Unskilled (total time *20 per hour Overheads (20 per60000 labour hours worked) Total relevant costs 165000 (A No. Of units (B)1 Cost per unit (AB) 165000 50000 64000 64000 202500 262144 363394 40000 94000 268000 1228038 16 76752.375 134000 Statement of selling price 1st unit seafarer Total relevant costs 165000 Add: mark-up 20% | 33000 Sales price (A 2nd unit seafarer 268000 53600 321600 16 units seafarer 1228038 245607.6 1473645.6 198000

No. Of units (B)1 Sale price per unit 198000 A B) 2 160800 16 92102.85

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