Company X plans to manufacture a Product A that requires substantial amount of direct labor on each unit. Based on the company s experience with other products that requires similar amounts of direct labor, management believes that a learning factor exists in the production process used to manufacture a Product A.
Each unit of A requires 50 square feet of direct material at a cost of $30 per square foot, for a total material cost of $1,500. The standard direct labor rate is $25 per direct labor hour. Variable manufacturing overhead is assigned to products at a rate of $40 per direct labor hour. In determining an initial bid price for all products, the company marks up variable manufacturing costs (=direct materials + direct labor + variable overhead) 30 percent. (That is, the bid = 130 percent of variable manufacturing costs.)
Data on the production of the first two lots (16 units) of product A follow:
1. The first lot of eight units required a total of $3,200 direct labor hours.
2. The second lot of eight units required a total of $2,240 direct labor hours.
Based on prior production experience, Company X estimates that production time will show no significant improvement after first 32 units. Therefore, a standard (for planning purposes) for direct labor hours will be established based on the average number of hours per units 16 through 32.
What is the basic learning curve?
What learning rate appears to be applicable to the direct labor required to produce product A?