In April 2004, Boeing launched the new 787 Dreamliner with 50 firm orders from All Nippon Airways of Japan. Boeing aimed to secure 200 firm orders by December. However, by December 2004, Boeing had only 52 orders. Then Airbus introduced the A350, a derivative of the existing A330, enhanced with a new wing, more fuel-efficient engines, and other new technologies. Airbus's Chief Commercial Officer, John Leahy, predicted that the A350 would draw Boeing customers and so "put a hole in Boeing's Christmas stocking." (Source: "350: Airbus's counter-attack,"Flight International, January 25, 2005.)

(a)

Draw a timeline to mark when a manufacturer incurs the costs of development and production.

(b)

How would the costs of developing the 787 Dreamliner vary with the total quantity manufactured?

(c)

Referring toFigure 7.5, compare Boeing's average cost with cumulative production of 50 and of 200 units. (Note that, inFigure 7.5, the average cost is not absolute but rather indexed to 100 with production of the first unit.)

(d)

Suppose that the price of a Boeing 787 is $120 million and that Boeing would just break even on the costs of development ($10 billion) and manufacturing with cumulative production of 200 units. How much would Boeing lose with cumulative production of 50 units?

Figure 7.5 illustrates an experience curve, where the unit (average) cost of production is indexed to 100 for the first unit produced. The unit cost falls most sharply with the initial units of cumulative production. Assuming a 20% cost reduction for every doubling of cumulative production (that is, a learning percentage of 80%), by the fourth unit of cumulative production the unit cost drops to 64, by the 32nd unit to 32.77, etc. The learning percentage determines the rate at which the unit cost falls with cumulative production. The lower the learning percentage, the higher the rate of cost reduction from doubling cumulative output. The learning percentage depends on the particular technology and process of manufacturing, and so varies with product and industry. 120.00 100.00 80.00 Unit cost 60.00 - 40.00- 20.00 0.00 + 200 400 600 800 1000 1200 Cumulative production FIGURE 7.5 Experience curve. Notes: The experience curve shows how the unit cost of production falls with cumulative production over time. An 80% learning percentage is shown, and the unit cost of production is indexed to 100 for the first unit produced