In its drive to develop fighter jets for the 21^st century, the Pentagon has embarked on an unprecedented experiment: making affordability, rather than optimum battlefield performance, the paramount goal. But will this approach fly any better than previous attempts to curb cost overruns and other excesses of U.S. military procurement?

The Pentagon rocked the defense industry by tapping Lockheed Martin Corp. to build the Joint Strike Fighter planes, which could turn out to be the richest military-aircraft contract in history. The broad outlines of Lockheed's task are clear: The Pentagon wants a supersonic, radar-evading combat aircraft with a single engine that is so flexible it can be used by each of the services, yet still carry an individual price tag averaging around $30 million.

By Defense Department standards, that is amazingly frugal. Some of the Navy's newest F/A-18 models that would be replaced by the new fighter, for example, cost roughly 50% more. The cut-rate price will only be feasible on two conditions, industry and government officials agree. The aerospace company must take a quantum leap in its use of "lean manufacturing" techniques to slash production costs, and the U.S. and its allies must order enough of the planes to allow for vast economies of scale.

Government officials confirm the first few hundred jets could cost $60 million or more apiece and that is if all goes smoothly. Defense industry experts will only predict that the Pentagon's low-ball estimate is bound to create trouble later on. Whatever the doubts, the Joint Strike Fighter marks a historic point for the defense industry's efforts to shed expensive old ways.

The Navy admiral in charge of the project reiterated that the average projected "fly away" cost measured at the end of the full production run and excluding the impact of inflation-remains squarely at $30 million a copy. U.S. and British military planners together say they have long-term plans to buy as many as 3,000 of the planes; other countries could buy several hundred more.

But the true challenge in holding down costs for a new airplane occurs during earlier phases of production, industry officials concede. During the past three decades, companies developing new aircraft have often stumbled over the time necessary to perfect a new design, as well as the practical and political difficulties of fielding superior technology. Planes typically take a decade or more to go from drawing board to flight line, leaving them vulnerable to shifts in spending priorities and the nation's overall economy.Costs can balloon amid unforeseen technical hurdles and partisan tugs of war.

Military officers say, they are prepared to make compromises on technical advances in order to put a firm lid on costs. If contractors conclude they are headed for significant overruns, the Pentagon will ease design criteria dealing with "performance, radar signature, acceleration or range," said Lt. Gen. George Muellner, who at time was in charge of Air Force weapons purchases.

Question#1

What percentage of learning curve (%L) Lockheed must achieve in order to breakeven at the cumulative average price of $30 million apiece on an expected 3,000unit production and sales of the Joint Strike Fighter planes? Assume that the cumulative average cost of the first 300 planes is $60 million apiece and ALL production and operating costs are subject to potential learning efficiencies.

Question#2

What factors will be critical in realizing a profit at the proposed #30 million cumulative average price per plane?

Question#3

For reducing risk of overreliance on a single source and to increase competition, some leaders in the congress argued that the contract should be split evenly between the two companies- Boeing and Lockheed. Estimate the possible impact of such splitting on the cost of the project? Assume that both companies would have similar cost structure and would be able to achieve the same rate of learning as computed in part (1) above. That is, for both companies the cumulative average cost of the first 300 planes is $60 million apiece and all production and operating costs are subject to potential learning efficiencies.