Learning Curve Assignment

Example 1 The assembly of the first 25 units of a new model of cell phone took 300 hours of direct labor. This type of assembly experiences a learning effect of 85%. Compute the average labor hours per unit of a subsequent lot of 60 units and a further lot of 90 units. Example 2 Based on actual data of a first few items assembled of a new product the following regression relation was found with a correlation coefficient of 0.9987. Y = 300 x 0.286 Where Y is average direct hours and X is cumulative number of units produced. Find learning rate (learning effect), interpret the relation and compute total direct hours for first 50 units assembled. Example 3 i. Explain the concept of learning curve effect, learning index, learning rate and the mathematical model of learning curve. What are the factors that bring about this phenomenon ? How is this concept useful in managerial decisionmaking ? ii Based on actual data of a first few items assembled of a new product the following regression relation was found . log10 Y = 2.477 0.286 log 10 X where Y is the average direct labor and X the cumulative number of units produced. Interpret the significance of this relation and the meaning of the regression parameters. Example 4 HOMEPRODUCTS have been buying their requirements of motors, used in the washing machines manufactured by them, from an external supplier. The need 10,000 motors for the current year and the requirements are expected to increase in the future. The price for the current year is Rs.2,800 per motor. As the supplier has been increasing the prices year to year, the company is considering whether it would be economical to assemble these motor in-house. A committee appointed came to the conclusion that it would be technically possible to assemble these motors in-house with no extra fixed facilities, but additional labor will have to be recruited and economical production lots would be 1000 motors.The assembly will have 85% learning effect. The cost estimated is given below. Find best decision. Batch : 1000 motors Purchased components Direct assembly labour Factory variable overheads Factory fixed overheads General overheads O Total 3,256 Rs.000 800 900 360 applied on labor cost 900 296- @ 10% of material, labour, overhead costs ________

Example 5 ARTLINE have developed a new gadget. A trial unit assembled required 50 hours of direct labor for assembly. The assembly of this type of gadget is expected to have a learning effect of 85%. ARTLINE has the option of manufacturing this gadget inhouse or sell the rights outright for a cash payment of Rs.7,00,000. If ARTLINE undertakes own manufacture they will market this gadget only for a period of 3 years by which time the product will be revamped. They can allocate 6000 hours of direct labour for manufacture of this gadget which will be increased by 600 hours each year in the 2nd and 3rd year respectively. Assume the additional direct labor hour also can exhibit same learning effect of 85%. The gadget can be sold at a price of Rs.1400 per unit fixed for all the three years. Whatever is produced in each year can be sold in that year. The cost data are: - cost of components Rs.300 per unit, variable overheads @40% of direct labor cost, general overheads at 60% of prime cost. Labor rate is Rs.25 per hour. The cost of capital is 18%. Assume there is no uncertainty in sales cost data and units must be rounded to nearest integer. Give your recommendation for ARTLINE. Assume all cash flows occur at the end of year. Example 6 MICRONICS develop novel types of electronic gadgets. One new gadget recently developed took 100 hours of direct labour for assembly of the first unit and studies from the first 10 units assembled for testing and demonstration showed that there will be a learning effect of 82%. The company has the option of assembling and marketing the gadget on its own or sell-off the rights at a price of Rupees 10 lakhs. If assembled, the life cycle of the gadget is expected to be only 3 years, as by then further new gadgets will displace this gadget. The current cost of components is Rs.1200 per unit. The annual variable overheads of Rs.350,000. Current labor rate is Rs.60 per hour and this will escalate at a rate 10% per anum in the future years. The components cost will decline at a rate of 5% per anum in the future years. The companys policy is to set a selling price to yield 30% gross margin. If in-house assembly is undertaken the company will allocate the same hours of labor for this gadget in each of the three years. The labor allocated would be adequate to assemble about 240 units in the first year.[inclusive of the 10 test units.] a. Determine the yearly outputs and profits under own assembly. Ii Assess the benefits of in-house assembly. The companys cost of capital is 18%. Since the annual Sales will be uniformly spread over the months of the year, assume that the operating profits during a year will be realized at the middle of the year. Iii Give your recommendation as to whether the company should assemble or sell-off the rights. iv. Enumerate some of the other factors ( financial and non-financial) that may have a risk implication if the company decides to assemble on its own. Example 7 NOVOCRAFTS have developed a new gadget. A trial unit assembled required 25 hours of direct labor for assembly. The assembly of this gadget is expected to have the following equation: Ln ( t ) = 3.1781 0.2345 Ln ( Q ) Where t is average time of assembly hr/unit & Q is cumulative units Novocrafts have the option of manufacturing this gadget in-house or sell the rights outright for a cash payment of Rs.600,000. If Novocraft undertake own manufacture they will market this gadget only for a period of 3 years by which time the product

will be revamped. They can allocate only a same fixed amount of direct labour for manufacture of this gadget in each of the three years. The labour allocated is adequate to assemble about 520 units during the first year. The gadget can be sold at price of Rs. 1400 per unit fixed for all the three years. Whatever is produced in each year can be sold in that year. The cost data are Cost of components = Rs.300 per unit; Variable overheads @ 40% of direct labour cost, General overheads at 60% of prime cost. Labor rate is Rs.50 per hour. The cost of capital is 18%. Assume that each years earnings will be realizable at the end of the year .There is no uncertainty in the sales-cost data. Give your recommendation as to the best decision for Novocrafts. Calculate the cost of capital where both the decisions will be equally beneficial. Example 8 TECHNOVA specialize in development, design and marketing of sophisticated gadgets for industrial use. Recently they have developed a gadget, SONADAMP, a noise reducer that can be used with heavy machinery. Technova have assembled a few units of this gadget for test purposes. Using the data on these assembly, they have established the following regression relationship which is found to give an excellent fit to the observed data. Ln ( t ) = 0.9929 0.25 Ln ( Q ) (natural logarithm ) Where, Y= average direct labour used in assembly; X= cumulative number of units assembled. Technova have decided to market this product. However, they expect that in two years time other competitive products of similar nature will be marketed. Hence they will market Sonadamp only for a period of two years. Technova will allocate approximately 60,000 hours of directylabour for assembly of sonadamp in each of the two years. Labour cost is estimated at Rs.50 per hour. There will be cash outflow of Rs.40 lakes per year to cover fixed costs, irrespective of output levels. Technova have estimated the gross contribution per init as Rs.17,000 for the first year and Rs.15,000 for the second year. This contribution is exclusive of Rs.1000 per unit to be incurred as variable cost of selling and the labour cost. All units assembled can be sold. It is also estimated on technical grounds, that the assembly time for sonadamp cannot be reduced below 90 hours per unit. a. Interpret the significance of the regression relation and the meaning of the regression coefficients. b. Determine the number of units of sonadamp that can be assembled in each of the years under conditions given above, and evaluate the profits for each year. Example 9.. A company has developed a new electronic item. The company must decide whether to manufacture for 3 years or sell the technical knowhow now at Rs.15 Lakh.The manufacturing capacity of 3000 hrs/year remains constant every year. The capacity is sufficient to produce 520 units in first year and 766 units in second year. This is due to effect of learning in production process. The selling price is Rs 1400/unit, cost of material consumed is Rs 300/units and wage rate is Rs 50/hr. Variable overheads are absorbed at 40% of direct labour cost and general overheads are absorbed at 60% of prime cost. The material supplier offers 5% discount in second year and cost of capital is 12% p.a Assume all cashflows occur at middle of respectively year. Give your recommendation to company with justification. Example 10 .A Company manufactures radar system. The first unit required 3000 direct labour hours and manufacturing is subject to 90% learning. The variable costs are: Direct Material Rs 40 lakh per unit Direct labourRs 1250 per hour

Variable Overheads 60% of direct labour cost. Calculate total variable cost for manufacturing 10 units. Exam ple 11 Unit No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Incremental time for unit No 1000 700 620 570 540 515 495 475 465 450 440 430 425 415 410 405 395 390 385 380

Find learning % and total time for 25 units.

Example 12 M/S HITEK ENGINEERS is a registered partnership company having office at Borivali and factory at g-52 MIDC Tarapur, Boisar Dist. Thane. The company is led by a team of qualified engineers from 1.1 T Mumbai. The company is existing since 1985 and is an approved manufacturer of chemical process equipments, mechanical parts and electronic devices. They are registered as a vendor by leading engineering consultants such as Humphreys and Glasgow, Engineers India LKtd, ICI Ltd, toyo Engineering India LTD, Uhde India Ltd, Pipecon consultants etc. They have executed orders upto 1 crore and erected and commissioned plants foe dyes and intermediate, drugs, organic chemicals on behalf of reputed manufacturing companies. The manufacturing process for all the above in carried out in 3 departments having manufacturing capacity of 3000 hrs, 1600 hrs& 3200 hrs for departments A, B,& C respectively per year. As of now the situation is really th0ugh for the company because of lack of demand for primary goods. This has resulted in capacity utilization of only 50% for all the 3 departments. To utilize capacity fully the company is in the market for getting orders either directly or through the engineering consultants. Recently one of the leading consultant Engineers India Ltd has approached the company to manufacture/ assemble an electromechanical device on behalf of their client BARC. Hitek Engineers having already executed orders of Engineers India Ltd have been asked to quote the price for the above assembly. The company is registered with National small scale Industrial Corporation & hence will be exempted from tender bid deposit for all the future orders from B.A.R.C. who have indicated a demand of 300 units in 1st year 800 units in 2nd year. To assess the capability the company has assembled one trial unit successfully. The assembly time was found to be 16 hrs, 10 hrs& 15 hrs in departments A , B, C resp. It was also observed that material content worth Rs. 250 & Rs.150 was required in departments A & C. whereas there was no material or component consumed by department B. The production managers of departments A, B, C, felt that the labourhrs required for 1st unit assembled i.e.16hrs, 10hrs,and 15hrs. would reduce due to learning process. This learning process is estimated to have an effect of 85%, 80% and 90% in departments A, Band C respectively. All the 3 departments have different wage rates as skill set required is different. The standard wage rates are 30/hr,20/hr and 25/hr in department A, B, & C.

Nevertheless the overtime rate would be 50% excess for all 3 departments. The accounts departments. The accounts department has been following absorption costing principles. The variable overheads are recovered as 50 percentage of direct labour cost including overtime charges if any. Similarly fixed overhead are recovered as 120% of directlabour cost including overtime charges if any. The pricing method is cost plus pricing with markup of 25% to total cost. Due to recessionery trend in economy it is expected to obtain 10% discount in materials consumed in 2nd year. To account for price increases, wage rate is expected to be 10% higher in 2nd year. Determine the prices to be quoted to Engineers India Ltd on behalf of B.A.R.C.