Learning Curves Emotional Headdress (EH) is a Des Moines, Iowa, manufacturer of avant garde hats and headwear. On March 11, 2010, the company purchased a new machine to aid in producing various established product lines. Production efficiency on the new machine increases with the workforce experience. It has been shown that as cumulative output on the new machine increases, average labor time per unit decreases up to the production of at least 3,200 units. As EH's cumulative output doubles from a base of 100 units produced, the average labor time per unit declines by 15 percent. EH's production varies little from month to month and averages 800 hats per month. Emotional Headdress has developed a new style of men's hat, the Morrisey, to be produced on the new machine. One hundred Morrisey hats can be produced in a total of 25 labor-hours. All other direct costs to produce each Morrisey hat are $16.25, excluding direct labor cost. EH's direct labor cost per hour is $15. Fixed costs are $8,000 per month and EH has the capacity to produce 3,200 hats per month.

 

Decrase in Avg DLHs/Unit when output doubles								15%
Average Hats/Month:								800
Fixed cost per month								$8,000
Capacity (hats per month)								3,200
New hat (the Morrisey):
Other Direct Costs/Hat:								$16.25
Markup on Cost:								125%
Batch size								100
Hours per batch								25
Direct labor cost per hour								$15.00

Required

1. Emotional Headdress wishes to set the selling price for a Morrisey hat at 125 percent of the hat production cost. At the production level of 100 units, what is the selling price?

2. The company has received an order for 1,600 Morrisey hats from Smiths, Inc. Smiths is offering $20 for each hat. Should the company accept Smiths' order and produce the 1,600 hats? Explain.