Korpptek Inc manufactures and sells computer tablets, operating in a state-of-the-art manufacturing environment. The Board of Directors is investigating the financial viability of a new tablet, the 'Ultimate'. The Ultimate incorporates cutting edge graphics and sound never seen on a tablet before. When launched, the Ultimate will be the most up-to-date computer tablet on the market, way ahead of anything else currently available. It is only expected to have a life of a year, however, due to the highly competitive and fast-moving nature of the sector. Initial design, development, testing, production set-up, market research and pre-sales marketing costs have been significant. Market research indicates potential sales of 2,000 units in the year. Korpptek Inc has decided to set the minimum selling price of an Ultimate by calculating the estimated cost per tablet and adding a 25% mark-up.

Estimated production costs are as follows:

The company anticipates direct labour costs will decrease over time.

The first unit took 100 hours to make.

Labour is paid at $50 per hour.

A 75% learning rate is expected to apply for the first 500 units after which a steady state production time will apply.

The labour time per unit after the first 500 units will be equal to the time for the 500th unit.

The log of learning for a 75% learning rate is 0.4150.

Variable overhead is estimated at $37 per labour hour.

Metals, plastics and other materials will be $550 per unit for the first 200 units produced. The second 200 units will cost 90% of the cost per unit of the first 200 units. All units from then on will cost 90% of the unit cost for each of the second 200 units.

Production of the Ultimate will require two additional specialist machines and more factory space.

These items will be rented at a total monthly fixed cost of $9,000.

1. Explain the impact of the learning effect on budgeting in Korpptek Inc.

2. Ignoring the initial design, development, testing, production set-up, market research and pre-sales marketing costs, what is the minimum selling price per tablet that Korpptek Inc requires to achieve for each Ultimate in order to make its target profit mark-up of 25%? Show all workings.

3. Critically assess the relevance of the learning curve in Korpptek Inc's manufacturing environment.

4. Evaluate how life cycle costing could be introduced and applied in Korpptek Inc.