Question

1. A supplier charges $11.99 per unit for bulk lots of proprietary 6 ft. high speed HDMI cables.  Assuming:

1. A profit margin of 8% and a cost markup pricing approach
2. Direct material costs of $6.50 per unit
3. Direct labor costs of $1.50 per unit
4. An industry average of overhead costs of 200% of labor costs.

Do you feel that the price per unit is fair, or do you need to apply pressure for a substantially lower price?   Why?

2. A labor intensive product takes 115 hours to assemble for the first unit.  How long would it take to assemble the 25^thunit assuming a 92% learning rate?  

3. If the learning rate is assumed to be 88%, how long would it take to assemble the 50^thunit?

Answer 1

1.

Direct Material = $6.50

Direct Labour = $1.50

Overheads = $1.50 x 200% = $3.00

Total cost = $11.00

Sales price after profit margin = $11.00 x 1.08 = $11.88

Since sales price is lower than what supplier charges, we need not pressurie.

2.

cumulative average time per unit = time taken to produce initial quantity x the cumulative units of production ^ the learning index

The learning index = Log 0.92 / Log 2 = -0.1203

cumulative average time per unit for 25 units = 115 hrs x 25 ^ -0.1203 = 78.08 hrs for 25 units

Total time for 25 units = 78.08 hrs x 25 = 1,952 hrs

cumulative average time per unit for 24 units = 115 hrs x 24 ^ -0.1203 = 78.46 hrs for 24 units

Total time for 24 units = 78.46 hrs x 24 = 1,883 hrs

Time taken for 25th unit = 1,952 hrs - 1,883 hrs = 68.85 hrs

3.

The learning index = Log 0.88 / Log 2 = -0.1844

cumulative average time per unit for 50 units = 115 hrs x 50 ^ -0.1844 = 55.89 hrs for 50 units

Total time for 25 units = 55.89 hrs x 50 = 2,795 hrs

cumulative average time per unit for 24 units = 115 hrs x 49 ^ -0.1844 = 56.10 hrs for 49 units

Total time for 24 units = 56.10 hrs x 49 = 2,749 hrs

Time taken for 25th unit = 2,795 hrs - 2,749 hrs = 45.67 hrs