Learning Curves: Kelly Company plans to manufacture a product called Electrocal, which requires a substantial amount of direct labor on each unit. Based on the company's experience with other products that required similar amounts of direct labor, management believes that there is a learning factor in the production process used to manufacture Electrocal.

Each unit of Electrocal requires 50 square feet of direct material at a cost of $30 per square foot, for a total material cost of $1,500. The standard direct labor rate is $25 per direct labor-hour. Variable manufacturing overhead is assigned to products at a rate of $40 per direct labor-hour. The company adds a markup of 30 percent on variable manufacturing costs in determining an initial bid price for all products.

Data on the production of the first two lots ( 16 units) of Electrocal is as follows:

1. The first lot of eight units required a total of 3,200 direct labor-hours.

2. The second lot of eight units required a total of 2,240 direct labor-hours.

Based on prior production experience, Kelly anticipates that there will be no significant improvement in production time after the first 32 units. Therefore, a standard for direct labor-hours will be established based on the average hours per unit for units 17-32.

Required:

a. What is the basic premise of the learning curve?

b. Based upon the data presented for the first 16 units, what learning rate appears to be applicable to the direct labor required to produce Electrocal? Support your answer with appropriate calculations. c . Calculate the standard for direct labor-hours that Kelly Company should establish for each unit of Electrocal.

d. After the first 32 units have been manufactured, Kelly Company was asked to submit a bid on an additional 96 units. What price should Kelly bid on this order of 96 units? Explain your answer.

e. Knowledge of the learning curve phenomenon can be a valuable management tool. Explain how management can apply the learning curve in the planning and controlling of business operations.