Problem $8-53($Algo$)$ Learning Curves $[$LO $8-1,8-5]$

$[$The following information applies to the questions displayed below.$]$

Ellington Company manufactures a line of motorbikes and dirt bikes under the trade

name CrossCountry. The company has been in business for almost $20$ years and has

maintained a profitable share of the recreational vehicle market due to its reputation

for high$-$quality products. In addition, Ellington's engineering department has kept the

company in the forefront by incorporating the latest technology in the CrossCountry

bikes. Most subassembly work for the bikes is subcontracted to reliable vendors.

However, the final assembly and inspection of all products is performed at Ellington's

plant.

Ellington recently developed a new braking system for the CrossCountry Model$-500$

dirt bike. Because of the company's current availability of production capacity, Jim

Walsh, production manager, recommended that the first lot of the new braking system

be manufactured in$-$house rather than by subcontractors. This $120-$unit production run

has now been completed. The cumulative average labor hours per unit for the

braking system was $120$ hours. Ellington's experience with similar products indicates

that a learning curve of $80\%$ is applicable and that the learning factor can be

expected to extend only through the fourth production run $(120$ per batch$)$ for a total

of $480$ units.

Ellington's direct labor cost is $$23$ per direct labor hour. Its management must decide

whether to continue producing the braking system in its own plant or to subcontract

this work. Joyce Lane, Ellington's purchasing agent, has received a proposal from

MACQ, a company specializing in component assembly. MACQ has done work in the

past for Ellington and has proved to be a high$-$quality and reliable vendor. The terms

of MACQ's proposal are negotiable, and before beginning discussions with them,

Joyce has decided to conduct some relevant financial analysis.

Required:

$1.$ Ellington Company has an immediate requirement for a total of $1,000$ units of the braking system. Determine the company$$s future direct labor costs to produce the required braking system units if it manufactures the units in$-$house.

A consultant has advised Joyce that the learning rate for this application might be closer to $75\%.$ What is the effect on projected costs of using a $75\%$ learning rate as opposed to an $80\%$ learning rate?