Bello Suits Ltd has designed a radically new suit with the intention of selling them to professional racing teams. The estimated cost and selling price of the first suit to be manufactured and assembled is as follows: K

Materials 1,500

Assembly labour (50 hours at K15/Hour) 700

Fixed overheads (200 % of Assembly labour) 1,320

Profit (20 % of total cost) 400

Selling price 3,920

Belo suits Ltd plans to sell all suits at a total cost plus 20% and the material cost per suit will remain constant irrespective of the number sold. Bello suit’s management expects the assembly time to gradually improve with experience and estimated a 90% learning curve.

A Commercial bank has approached the company and asked for the following quotations:

1. If we were to purchase the first suit assembled, and immediately put in order for second, what would be the price of the second suit?

2. If we waited until you had sold two suits to another Bank, and then ordered the third and fourth suits to be assembled, what would be average price of the third and fourth suits?

3. If we decided to immediately equip our entire staff with the new suit, what would be the price per suit, if we placed an order for the first eight to be assembled?

Required;

(a) Explain the learning curve theory and explain the concept of accumulative average time. 

(b) Provide detailed price quotations for each of the three enquiries outlined above

(c) Identify the limitations of the learning curve theory