Felicity Company plans to manufacture a product called Electrocal, which requires a substantial amount of direct labor on each unit. Based on the company's experience with other products that required similar skills, management believes that there is a learning factor in the production process used to manufacture this product.
Each unit of Electrocal requires 50 square feet of raw materials at a cost of $30 per square foot for a total materials cost of $1,500. The standard direct labor rate is $25 per hour. Variable factory overhead is assigned to products at a rate of $40 per direct labor hour. The company adds a markup of 30% on variable manufacturing cost in determining an initial bid price for all products.
Data on the production of the first two lots (16 units) of Electrocal are as follows:
(a) The first lot of 8 units required a total of 3,200 direct labor hours.
(b) The second lot of 8 units required a total of 2,240 direct labor hours.
Based on prior production experience, the company anticipates that there will be no significant improvement in production time after the first 32 units. Therefore, a standard for direct labor hours will be established, based on the average hours per unit for units 17 through 32.
Required:
(1) What is the basic premise of the learning curve?
(2) Based on the data presented for the first 16 units, what learning rate appears to be applicable to the direct labor required to produce Electrocal?
(3) Calculate the standard for direct labor hours that the company should establish for each unit of Electrocal.
(4) After the first 32 units were manufactured, the company was asked to submit a bid on an additional 96 units. What price should the company bid on this order of 96 units?
(5) Knowledge of the learning curve phenomenon can be a valuable management tool. Explain how management can apply the learning curve in planning and controlling business operations.