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

REQUIRED 1. Calculate predicted total costs of producing the seven PT109s for the Navy. (Nautilus will keep the first deployment boat assembled, costed at $725,000, as a demonstration model for potential customers.)
2. What is the dollar amount of 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 units produced and direct manufacturing labour-hours.LO1

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Nautilus reports the following cost information for the first PT109 assembled and uses an 85% cumulative average-time learning model as a basis for forecasting direct manu- facturing labour-hours (DMLH) for the next seven PT109s. (An 85% learning curve means b = -0.234465.): Direct materials Direct manufacturing labour time for first boat labour-hours (DMLH) Direct manufacturing labour rate Variable manufacturing overhead cost Other manufacturing overhead Tooling costs Learning curve for manufacturing labour time per boat $ 100,000 10,000 $ 30 $ 20 25% per direct manufacturing labour-hour (DMLH) per direct manufacturing labour-hour (DMLH) of direct manufacturing labour costs $500,000 85% cumulative average timeb