SUBJECT: MANAGEMENT ACCOUNTING AND FINANCE 3A

QUESTION 5 (20 Marks)

REQUIRED Use the information provided below to answer the following questions:

INFORMATION

Octopus Limited is developing a new product. During its expected life, 16 000 units of the product will be sold for R140 per unit. Production will be in batches of 1 000 units throughout the life of the product. The direct labour cost is expected to reduce due to the effects of learning for the first eight batches produced. Thereafter, the direct labour cost will remain constant (i.e., the steady-state production level) at the same cost per batch as the eighth batch. The direct labour cost of the first batch of 1 000 units is expected to be R100 000 and a 90 per cent learning effect is expected to occur.

The direct material and other non-labour related variable costs will be R50 per unit throughout the life of the product. There are no fixed costs that are specific to the product.

REQUIRED:

5.1. Discuss the concept of learning curve and highlight its relevance to the setting of standards. (5 marks)

5.2. Calculate the expected direct labour cost of the eighth batch (Note: The learning index for a 90 per cent learning curve is - 0.152). (7 marks)

5.3. Calculate the expected contribution to be earned from the product over its lifetime. (4 marks)

5.4. Suppose that a learning effect will continue for all of the 16 batches that will be produced. Calculate the rate of learning required to achieve a lifetime product contribution of R136 790, assuming that a constant rate of learning applies throughout the products life.