Question

At your Comp4U store, a common computer model has the following cost breakdown:

Parts and materials                      $900

Labor = 3 hrs x $50/hr                    150

Overhead                                          200

Profit margin                                    200

Total (price to customer)                              $1450

A local customer has requested a bid for 20 identical computers. You figure that there is a 90% learning rate possible on the labor. If all other costs stay the same per unit and you want to maintain the same profit amount in dollars per unit, what is the price per unit you would bid to obtain the lowest price?

Answer 1

The first assumption we are making here is that the overhead is the variable overhead cost type i.e. overhead will continue to remain as $200 / item

The only item which will change due to learning rate is the labour hours required.

We will use standard learning curve table to arrive at required.

We need to make additional 20 computers. Therefore we have to calculate ( using learning curve table ) total hours required to make 21 computers and subtract time required to make the first computer.

It is given that the Learning rate = 90%

Labour hours required for the first item = 3 hours

Using learning curve table, total labor hours required to make to 21 computers =4 5.71 hours

Therefore time required to make 20 identical computers

= Time required to make 21 computers – Time required to make first computer

= 45.71 – 3 = 42.71 hours

Therefore average time required to make each of the 20 computers = 42.71/20 = 2.1355 hours

Hence cost of labour for each of the 20 computers = $50 / hour x 2.1355 hours = $106.775

Total cost to make each of the 20 computers

= Per unit parts and material cost + Per unit labor cost + Per unit overhead cost

= $900 + $106.775 + $200

= $ 1206.775

Total price per unit of 20 computers

= Per unit total cost + profit margin $200 / unit

= $1206.775 + 200

= $1406.775

Therefore price per unit we should bid = $1406.775

PRICE PER UNIT WE WOULD BID = $1406.775