Advanced: Application of learning curve to determine the incremental costs for different production batches Limitation pic commenced the manufacture and sale of a new product in the fourth quarter of 2000. In order to facilitate the budgeting process for quarters 1 and 2 of 2001, the following information has been collected:

(i) Forecast production/sales (batches of product):

(ii) It is estimated that direct labour is subject to a learning curve effect of 90%. The labour cost of batch 1 of quarter 4, 2000 was £600 (at £5 per hour). The labour output rates from the commencement of production of the product, after adjusting for learning effects, are as follows:

Labour hours worked and paid for will be adjusted to eliminate spare capacity during each quarter. All time will be paid for at £5 per hour.

(iii) Direct material is used at the rate of 200 units per batch of product for the first 20 batches of quarter 4, 2000. Units of material used per batch will fall by 2% of the original level for each 20 batches thereafter as the learning curve effect improves the efficiency with which the material is used. All material will be bought at £1.80 per unit during 2001. Delivery of the total material requirement for a quarter will be made on day one of the quarter. Stock will be held in storage capacity hired at a cost of £0.30 per quarter per unit held in stock. Material will be used at an even rate throughout each quarter.
(iv) Variable overhead is estimated at 150% of direct labour cost during 2001.
(v) All units produced will be sold in the quarter of production at £1200 per batch.
Required:

(a) Calculate the labour hours requirement for the second batch and the sum of the labour hours for the third and fourth batches produced in quarter 4, 2000. (3 marks)

(b) Prepare a budget for each of quarters 1 and 2, 2001 showing the contribution earned from the product. Show all relevant workings.
(14 marks)

(c) The supplier of the raw material has offered to deliver on a ‘just-in-time’ basis in return for a price increase to £1.90 per unit in quarter 1, 2001 and £2 per unit thereafter.
(i) Use information for quarters 1 and 2, 2001 to determine whether the offer should be accepted on financial grounds.
(ii) Comment on other factors which should be considered before a final decision is reached. (8 marks)

(d) Limitation pic wish to prepare a quotation for 12 batches of the product to be produced at the start of quarter 3, 2001.
Explain how the learning curve formula y = ax’ may be used in the calculation of the labour cost of the quotation. Your answer should identify each of the variables y,

a, x and

b. No calculations are required.

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quarter 4, quarter 1, quarter 2, 2000 30 batches 2001 45 batches 2001 45 batches