Question

Hat Tricks Company (HTC) is a Buffalo, New York, manufacturer of hats and gloves. Recently, the company purchased a new machine to aid in producing the hat 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 HTC’s cumulative output doubles from a base of 100 units produced, the cumulative average labor time per unit declines by a learning rate of 80%.

HTC has developed a new style of men’s hat to be produced on the new machine. One hundred of these hats can be produced in a total of 40 labor hours. All other direct costs to produce each hat are $12 per hat, excluding direct labor cost. Direct labor cost per hour is $25. Fixed costs are $8,000 per month, and HTC has the capacity to produce 3,200 hats per month.

Required:

HTC plans to set the selling price for the new men’s hat at 200% of direct production cost. If the company is planning to sell 100 hats, what is the selling price? If the plan is to sell 800 hats, what should be the selling price? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Quantity	Selling price
100 hats	$44.00
800 hats	$34.24

1.) Selling price if 100 hats sold :-

Direct Labor cost = Labor hours x labor rate per hour

= 40 hour x $25 = $1,000

Other direct cost = 100 hats x $12 = $1,200

Total direct cost = 1,000 + 1,200 = $2,200

Direct cost per unit = 2,200/100 = $22

Selling price Is 200% of direct production cost

Therefore, selling price per unit = $22 x 200% = $44 per unit.

2.) Selling price if 800 hats sold:-

Calculation of direct labor hours to produce 800 hats using learning rate of 80%.

Cumulative quantity	Average time per 100 hats (hours)	Cumulative time taken (hours)
100	40	40
200	40 x 80% = 32	32 x 2 = 64
400	32 x 80% = 25.60	25.60 x 4 = 102.4
800	25.60 x 80% = 20.48	20.48 x 8 = 163.84

Direct Labor cost = Labor hours x labor rate per hour

= 163.84 hour x $25 = $4,096

Other direct cost = 800 hats x $12 = $9,600

Total direct cost = 4,096 + 9,600 = $13,696

Direct cost per unit = 13,696/800 = $17.12

Selling price Is 200% of direct production cost

Therefore, selling price per unit = $17.12 x 200% = $34.24 per unit.