Van Doorne horse trailers Van Doorne is a family business, specialised in the production of horse trailers. The engineering department of Van Doorne Trailers has estimated 100 direct labour hours for the assembly of the first trailer of a new horse trailer line. The standard labour rate is €10 per hour. In the previous month, the new horse trailer has been taken into production for the first time. During this month, the production department produced 10 trailers in 900 direct labour hours. Labour costs were a total of €9900.
Required:
1. Calculate a labour rate and a labour efficiency variance for production to this point.
2. Assume that the company has experienced a 90% learning effect on previous new trailers, using the cumulative average learning rate definition. Van Doorne’s management team expects a similar learning performance for the new horse trailer. Recalculate the labour efficiency variance when the learning effect is included in the targets for the production department.
3. Prepare a complete variance report, including the change in standards when the learning effect is built into the production targets. You can label this shift in targets the Change of efficiency standards variance.
Van Doorne knows that the direct labour hours for the second trailer were 88 hours. He just got a telephone call from a potential customer who wants to know the price of his trailer. He made a reservation and Van Doorne sees that the customer’s product will be trailer number 16.
Direct material costs of each trailer are €14800, direct overhead costs per trailer are €40 per labour hour, fixed overhad costs are €3200 per trailer and the profit margin is 12%. The profit margin is defined as a percentage of the selling price.
Required:
4. What is a competitive price for the prospective customer’s trailer, taking into account the learning effect and the required profit margin?