You own a workshop that produces custom handmade frames for diplomas. You are ne
ID: 444341 • Letter: Y
Question
You own a workshop that produces custom handmade frames for diplomas. You are negotiating a contract with The bookstore to sell the frames at the bookstore. The Bookstore decided to offer a trial contract where they will stock 20 frames at the bookstore. You estimate that the material costs for each frame is $15. You also estimate that it takes your employee 17 labor hours to produce the first frame. You pay your employee $25 per hour. Based on your observations, you noticed that your employee is on an 85% learning curve.
What is the lowest total bid you should submit if you charge a 10.0% markup, if you account for learning curve?
What is the lowest total bid you should submit if you charge a 10.0% markup, if you do not account for learning curve?
Explanation / Answer
No. of frames as per contract = 20
Materials cost = $15
Labor hour to produce the first frame = 17 hrs
Labor charges per hour = $ 25
Learning rate = 85%
By using Wright model, the learning curve function is defined as:
Y = aXb
Y – the cumulative average time / cost per unit
X - the cumulative number of units produced.
a – time (t) / cost (c) required to produce the first unit.
b - slope of the function = log of the learning rate / log of 2
i.e b = log 0.85 / log 2 = -0.2346
For cumulative total labour hours / cost:
XY = aX1-b
By applying the formula:
Cumulative average labor hours Yt = 8.42 hours per unit
Cumulative total labor hours XYt = 168.37
Cumulative average labor cost Yc= $ 12.38 per unit
Cumulative total labor cost XYc = $ 247.60
What is the lowest total bid you should submit if you charge a 10.0% markup, if you account for learning curve?
Total materials cost for 20 frames = 20 x $15 = $ 300
Total labor cost = $ 247.60
Total cost for 20 frames = $ 300 + $ 247.60 = $ 547.60
10% markup cost = $ 547.60 x 10% = $ 54.67
Lowest total bid for 20 frames = $ 547.60 + $ 54.67 = $ 602.36
What is the lowest total bid you should submit if you charge a 10.0% markup, if you do not account for learning curve?
Total materials cost for 20 frames = 20 x $15 = $ 300
Total labor cost = 17hr x $25 x 20 = $ 8500
Total cost for 20 frames = $ 300 + $ 8500 = $ 8800
10% markup cost = $ 8800 x 10% = $ 880
Lowest total bid for 20 frames = $ 8800 + $ 880 = $ 9680
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