RCM Limited is a company that manufactures products required by technology companies. Recently they designed an advanced product. This machine can be used to improve efficiencies in the construction of processors. Hence, the company is expecting a large market share.

Below are the figures showing the estimated cost and selling price of the first machine:

The manager of RCM Ltd has identified some aspects related to the sale of the new product: The selling price of the equipment will be determined by the total cost plus 20%. The cost of material required per product will not change, even if greater quantities are produced. The management expects that the workers will learn and improve regularly. They anticipate a learning curve of 85%.

RCM Ltd has been approached by Tech Ltd, which is interested in purchasing the new product. Tech Ltd has requested a quotation covering the following aspects:

1. If we decide to buy the first eight machines assembled, what would be the price per machine? 2. If we purchase the first machine manufactured and immediately place an order for the second one, what would be the price for the second machine? 3. If we are ready to wait for a while until RCM sells two machines to other buyers, and then place an order for the third and fourth machines, what would be the average price of these two machines?

(a) Explain how the selling price of a product can be established with the help of the learning curve. Also, point out, in brief, the other advantages of this theory, for managers, in relation to preparing budgets.

(b) Identify the potential limitations of the learning curve concept. (c) For the above inquiries of Tech Ltd, prepare price quotations.

\begin{tabular}{|l|r|} \hline & \multicolumn{1}{|c|}{$} \\ \hline Cost of material and components & 3,150 \\ \hline Labor costs (200 hours @ $12 per hour & 2,400 \\ \hline Overheads (40\% of labour cost) & 960 \\ \hline Total costs & 6,150 \\ \hline Profit (20\% of cost) & 1,230 \\ \hline Selling price & 7,380 \\ \hline \end{tabular}