Spar Solutions, Inc. (SSI) is an engineering and fabrication firm that specializes in manufacturing drilling rigs for deep water oil exploration. SSI produces a special drilling platform called the Spar Hull, which resembles a giant cylindrical hull that floats on the surface of the water, is anchored in place with giant chain and anchor systems, and is capped with the drilling platform, including derricks, workers’ quarters, and office space. Spar hulls can be more than 100 feet in diameter and comprise more than 20,000 tons of steel. A spar hull design is extremely stable and, although expensive, is resilient and capable of being deployed in locations where standard off-shore drilling platforms cannot be used.

SSI is headquartered on the west coast of Finland in a town called Pori. The shipyard where they design and build the spar hulls is capable of only producing one hull at a time. Because of long lead times, a 6-month building cycle, and the potential for currency fluctuations, they will only backorder one hull in their queue. Your engineering and design team has traveled to Pori to negotiate a contract for the design and construction of one of their specialized hulls. Because the technology is fairly constant across fabrications, you know that it took SSI about 100,000 labor hours to manufacture the first spar hull five years ago. Your company is interested in purchasing the next hull that will be available, which is the 7th in their product line.

1. Use the learning curve table in the module, and assume that SSI experiences a learning rate of 80%. Given an overall labor rate of $4,500 per hour for design and fabrication, what should you, as the manager in charge of the final contract price, be willing to pay for the 7th unit?

2. Suppose your purchase had to be delayed for three years. What would you pay for the 10th unit if you assume a steady state unit value of 10 and a learning rate of 70%