Drixhen Ltd is a company which manufactures a range of stringed instruments. A new guitar, which is suitable for beginners, has been commissioned by a national music school.

The management of Drixhen Ltd have complained that once new instruments have been in production for a while the budgeted costs for labour differ quite significantly from actual costs.

One of the company’s trainee management accountants has suggested introducing the learning curve technique to help more accurately estimate costs. Having analysed past data the trainee management accountant estimates that new instruments generally follow a 90% learning curve.

The following estimates have been prepared for the production of the Eagle breeze:

 £

Material cost per Eaglebreeze 150.00 Standard wage rate per hour 12.00 Standard Variable overhead per hour 7.50 The first new guitar took a total of 20 hours to produce but as this was produced a number of weeks ago the trainee management accountant has suggested that any learning that was gained in making the first guitar will have been lost and that the learning curve must start again. The first guitar will join the display of musical instruments within Dixhen Ltd’s factory.

Learning is expected to finish after the first 250 guitars and thereafter a standard cost will be created, based on the time taken for the 250th guitar.

Total fixed costs associated with the guitars per month are £10,000.

The company has a pricing policy of full cost plus a 25% margin.

Required:

(a) State the learning curve formula for the guitar. (Round the learning curve index to 3 decimal places)

(b) Calculate the total selling price, and the price per guitar, that should be charged for the first 150 guitars given that there is no guarantee of receiving further orders. (You should assume that it took one month to produce 150 guitars)

The national music company is extremely pleased with the guitar and contracts for a further 500 guitars on the understanding that these additional guitars will take two months to complete.

(c) Calculate the total price that you would charge, and the price per unit, for the additional 500 guitars

(d) Calculate price per guitar which would have been charged had the national school purchased all the guitars together.

(e) Explain to the management of Drixhen Ltd how the adoption of learning curve theory may solve some of the problems they are currently experiencing in relation to labour costs, highlighting any

 

Answer rating: 100% (QA)

Solution a The learning curve formula for the guitar can be calculated as follows Learning Curve Index LCI Total Hours 100 100 Material Cost Total Hou... View the full answer