Performance management question
An organization is developing a new product. During its predictable life, 16,000 units of the
product will be sold for $82 per unit. Production will be in batches of 1,000 units throughout the
life of the product. The direct labor cost is expected to reduce due to the effects of learning for
the first eight batches produced. Thereafter, the direct labor cost will remain constant at the same
cost per batch as the 8th batch. The direct labor cost of the first batch of 1,000 units is expected
to be $35,000 and a 90% learning effect is expected to occur. The direct material and other nonlabor related variable costs will be $40 per unit throughout the life of the product. There are no
fixed costs that are specific to the product.
Required:
(a) (i) Calculate the expected direct labor cost of the 8th batch. (4 marks)
(ii) Calculate the expected contribution to be earned from the product over its lifetime. (2
marks) Note: The learning index for a 90% learning curve = -0.152 It is now thought that a
learning effect will continue for all of the 16 batches that will be produced.
(b) Calculate the rate of learning required to achieve a lifetime product contribution of
$400,000 assuming a constant rate of learning applies throughout the product’s life. (4
marks)
