Cost estimation, cumulative average time learning curve. The Nautilus Company, which is under contract to the Canadian Coast Guard, assembles search and rescue boats. As part of its research program, it completes the assembly of the first of a new model (PT109) ofsearch and rescue boats. The Canadian Coast Guard is impressed with the PT109. It requests that Nautilus submit a proposal on the cost of producing another seven PT109s.

The accounting department at Nautilus reports the following cost information for the first PT109 assembled by Nautilus:
Direct materials $120,000 Direct manufacturing labour (10,000 labour-hours X $36) 360,000 Tooling cost* 60,000 Variable manufacturing overhead1' 240,000 Other manufacturing overhead11 90,000 $870,000 *Tooling can be reused at no extra cost, since all ofits cost has been assigned to the first search and rescue boat.
Variable overhead incurred is direcdy affected by direct manufacturing labour-hours; a rate of $24 per hour is used for purposes of bidding on contracts.
*Other overhead is allocated at a flat rate of 25% of direct manufacturing labour costs for purposes of bidding on contracts.
Nautilus uses an 85% cumulative average time learning curve as a basis for forecasting direct manufacturing labour-hours on its assembling operations. (An 85% learning curve implies b = -0.2345.)
Required 1. Prepare a prediction ofthe total costs for producing the seven PT109s for the Coast Guard.
(Nautilus will keep the first search and rescue boat assembled, costed at $870,000, as a demonstration model for other potential customers.)
2. What is the difference between

(a) the predicted total costs for producing the seven PT109s in requirement 1 and

(b) the predicted total costs for producing the seven PT109s assuming that there is no learning curve for direct manufacturing labour? (That is, for

(b) assume a linear function for direct labour-hours and units produced.)