Question

Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for batches of 1000 unites. The variable labor costs are $30 per unit for the first 1000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. What is the cumulative total time (labor hours) to produce 2,000 units based on the cumulative average-time learning curve?

I know that the answer is 160 hours but I don't understand how to get that answer.

Answer 1

Answer)

Learning curve observation means that the consumption of time will reduce as the production of number of units increase. This reduction in time is applicable to a certain stage known as stable stage. This observation is applied on labor hours when a new work is undertaken (as the labor will learn this new work and additional labor hours consumed will reduce on the production of subsequent units).

Learning curve rate is applied (80% in the given question) every time the production doubles to calculate average time consumed per unit on all the units. If production is done batch wise learning curve rate should be applied every time the number of batches doubles.

In the given question, the production is done in a batch of 1,000 units.

Calculation of Cumulative total labor hours to produce 2,000 units

Cumulative total labor hours required = Number of batches X Average time per batch

                                                                      = 2 batches X 80 labor hours per batch

                                                                      = 160 labor hours

Final Answer: Therefore total time taken to produce 2,000 units will be 160 labor hours.

Working Note:

Calculation of average time per batch when 2 batches (2,000 units) are produced

Average time per batch = Time taken to produce first batch X learning rate

                                            = 100 labor hours X 80%

                                           = 80 labor hours

Therefore, when two batches (2,000 units) are produced, the average time taken to produce per batch will be 80 labor hours.