Question

Barretta Ltd is a manufacturer of racing powerboats. It has designed a new racing boat called the Powerline 3 and expects to produce it in a continuous operation over an 18 month period. During this period, it is expected that a total of sixteen Powerline 3’s will be produced and sold. The production of the boat is a labour intensive operation and units are produced one after another.

The costs of producing the first boat are as follows: Skilled Labour – 1,200 hours at a rate of £40 per hour Unskilled Labour – 1,800 hours at a rate of £30 per hour Materials – £75,000 Overheads – £30 per labour hour worked (total of Skilled and Unskilled)

It is known that in producing any product, Skilled Labour usage experiences an 80% learning curve effect and Unskilled Labour usage experiences a 90% learning curve effect.

Baretta Ltd has decided to set the selling price per unit of the Powerline 3 by using the full cost plus method of pricing, with a profit mark up of 30%


Required: (a) Calculate the minimum selling price of

(i) the first unit of the Powerline 3. (ii) the second unit of the Powerline 3 (iii) the first 16 units of the Powerline 3 if ordered together

(b) Identify the method of setting the selling price that Champions Ltd has chosen. Explain how the learning curve model will affect the calculations for that selling price.
(c) Barretta Ltd Ltd also produce a further powerboat Ripper, which has been in production for a number of years, and to date 492 units of Ripper have been produced. The budget for the next quarter is showing the production of 75 units of Ripper. If the 1st ever unit took 900 hours and an 80% learning curve applies, calculate.
(i) the total labours hours needed for the production of the 75 units of Ripper.  
(ii) the average labour time per unit
(iii) explain where this information may be used by Barretta Ltd Ltd
Note: the learning co-efficient of 80% is -0.322

Answer 1

a). i).Selling price of first unit of Powerline 3 :
Skilled labour cost = 1200 hrs * 40 = 48000
Unskilled labour cost = 1800 hrs*30 = 54000
Materials = 75000
Overhead = (1200+1800) * 30 = 90000
Total Cost = 267000
Add: Profit margin 30% = 267000 * 30% = 80100
Selling Price = 347100

ii). Selling Price of second unit.:
Skilled labour hrs per unit = 1200 hrs * 80% learning curve = 960 hrs
Total skilled hrs = 960 * 2 = 1920 hrs
Unskilled labour hrs per unit = 1800 hrs * 90% learning curve = 1620 hrs
Total unskilled hrs = 1620 * 2 = 3240 hrs

Calculation of cost of 2 units of product:
Skilled labour cost = 1920 hrs * 40 = 76800
Unskilled labour cost = 3240 hrs *30 = 97200
Materials = 75000 * 2 = 150000
Overhead = (1920+3240) * 30 = 154800
Total Cost of producting 2 units =478800
Less: Cost of first unit = 267000
Cost of Second Unit = 211800
Add: Profit Margin 30% = 211800*30% = 63540
Selling price for Second Unit = 211800 + 63540 = 275340

iii). Selling price of 16 units:

Calculation of Hrs per unit as per learning effect.

Calculation of cost of 16 units:
Skilled labour cost = 491.52 * 16 * 40 = 314,572.8
Unskilled labour cost = 1180.98 * 16 * 30 = 566,870.4
Material cost = 75000 * 16 = 1,200,000
Overhead = (491.52 + 1180.98)*16 * 30 = 802,800
Total Cost = 2,884,243.2
Cost per unit = 2884243.2 / 16 = 180,265.2
Add: Margin 30% = 54079.56
Selling Price = 234,344.76

b). Company has chosen the cost plus markup method for setting the selling price. Due to Learning curve in skilled and unskilled labour. Labour hrs for producing double units is reduced by learning curve effect of which calculation is shown in iii) part of (a). Due to decrease in labour hrs labour cost also reduces for every unit more produced thus reducing the cost of producing another unit.