Advanced: Learning curve and break-even analysis.

A company is developing a new product. During its expected life it is forecast that 6400 units of the product will be sold fo

$70 per unit.

The direct material and other non-labour related costs are expected to be $45 per unit throughout the life of the product.

Production is expected to be in batches of 100 units throughout the life of the product. The direct labour cost is expected to reduce due to the effects of learning throughout the life of the product. The total direct labour cost of the first batch of 100 units is expected to be $6000 and an 80 per cent learning effect is expected to occur.

Fixed costs specific to this product are expected to be $60000 in total for the life of the product.

Note: The value of the learning index for an 80 per cent learning curve is —0.3219.

Required:

(a) Calculate the total direct labour cost of the first:
(i) 800 units (ii) 1600 units (iii) 3200 units (iv) 6400 units (4 marks)

(b) Apply the results from part

(a) to advise the company management of the approximate break-even level of sales of the product. (3 marks)

(c) Explain the effect on the break-even level of sales if the rate of learning was 90 per cent. (No calculations are required.) (3 marks)
(10 marks)
CIMA P2 Performance Management