(Appendix 2) Spacetech Corporation has been a supplier to the Orion Project since the program’s inception. Two years ago, Spacetech received a contract to produce 960 telecommunications devices to be used in space exploration. Fund¬ ing for the project has been curtailed, and Spacetech has received a contract modification decreasing the quantity of devices to be delivered to 240 units.

Direct material cost for each telecommunications device is $80,000 per unit. The direct labor is subject to a 95 percent learning curve. The average direct labor cost was estimated to be $50,000 per unit for the first lot of 30 units. This average direct labor cost figure and the 95 percent learning curve were used to develop the original bid for the contract. Variable manufacturing overhead was estimated to be 70 percent of direct labor cost. In calculating the original bid price, Spacetech added its regular markup of 35 percent on all variable manu¬ facturing costs.

The learning curve of 95 percent has proven to be accurate over the first 60 units. Maximum efficiency is expected to be achieved with the production of 240 units.

a. Describe the theory underlying the use of learning curves.

b. Determine Spacetech’s cumulative average cost of labor for producing 240 units.

c. If Spacetech Corporation should be asked to produce additional telecom¬ munication devices beyond the 240 covered by the amended contract, cal¬ culate the unit price Spacetech should bid, employing the same markup that was used in the original bid. (Hint: Determine the average cost of labor of the last 120 units.)

(CMA adapted)

Ethics and Quality Discussion