PENNSYLVANIA CORPORATION

.has developed a new product, cleverly named Product X, the manufacture of which requires an extremely high degree of technical skill. Management believes that there is an excellent opportunity for its technical force to learn and improve as they become accustomed to the production process. The production of the first unit required 10,000 direct labor hours. Management projects an 80% learning curve with respect to the production of Product X.

Additional cost information relating to this product is as follows:

REQUIRED:

Assume for questions 1, 2 & 3, that the company anticipates producing a total of 8 units of Product X

1. Upon completion of the eighth unit, the cumulative average direct labor hours required per unit of the product will be how much?

2. Upon completion of the eighth unit, the cumulative (total) direct labor hours will be?

3. After completing the first unit, the estimated total direct labor hours required to produce seven additional units will be?

4. NOW ASSUME that they have already produced one unit. The company seeks to bid on a government contract calling for the production of an additional 3 units. How many additional labor hours will be needed for this government contract?

5. REGARDLESS OF YOUR ANSWERS ABOVE, NOW ASSUME for the remainder of this problem that these three units will require 15,000 direct labor hours. They have ample capacity to produce the additional 3 units without disrupting other operations. The company prices these parts on a cost-plus basis using full manufacturing cost as the basis for their bid and a markup of 25%. How much should the company bid on this project?

6. Assume the same situation, and the company has now received a one-time special order from a foreign customer for 3 units, at a total price of $725,000. Again assume that there is ample capacity to produce the required units without affecting normal operations and that these three units will require 15,000 direct labor hours as noted in #5 above. Should they accept or reject this order? Why or not? How much better or worse off would they be if the accepted this order? What is the minimum price that they must charge for this order, in total and per-unit, without negatively affecting their profit?

7. Assume the same facts as #6 above, except that they are currently operating at full capacity and that accepting the special order will require them to displace regular work. Assume that the labor hours required for the 3 additional units of Product X could have been used to produce 10 units of their other product, Product Y, for which the following per-unit information is available:

NOW should they accept or reject the order? Why or why not? How much better or worse off would they be if they took this order? What is the minimum price that they could charge for this order, in total AND per unit, without affecting their bottom line?

Direct materials Direct labor rate Variable overhead: Applied on the basis of direct-labor hrs Fixed overhead: Applied on the basis of direct-labor hrs Variable selling Fixed selling Variable adminstrative Fixed administrative $75,000 per unit $25 per hour $6 per hour $10 per hour $3,000 per unit $1,000 per unit $2,500 per unit $2,000 per unit