Chapter 9 - Quantitative Analysis

Question 0

Learning curves

Answer 0

The learning curve effect can be calculated by:

Method 1: Set up a table and reduce the average time by the learning rate each time the output doubles.

Method 2: Using the formula y = ax^b
y = cumulative average time (or average cost) per unit or per batch.
a = time (or cost) for first unit or batch
b = log r/ log 2 (r = rate of learning, as a decimal)
x = cumulative output in units or in batches

Question 1

High/ low analysis

Answer 1

A method of analysing a semi-variable cost into its fixed and variable elements based on an analysis of historical information about costs at different activity levels.

The approach is as follows:-

Step 1: Select the highest and lowest activity levels and their costs.

Step 2: Find the variable cost/unit.

Variable cost/unit = (Cost at high level of activity - Cost at low level activity)/ (High level activity - Low level activity)

Step 3: Find the fixed cost using either the high or low activity level.

Fixed cost = Total cost at activity level - Total variable cost

Step 4: Use the variable and fixed cost to forecast the total cost for a specific level of activity.

Question 2

Limitations of the learning curve model

Answer 2

The model applies if:
1. The process is labour intensive: The learning effect will not apply if machines limit the speed of labour.

2. There are no breaks in production
3. The product is new
4. The product is complex: The more complex, the more likely e learning effect will be significant and the longer it will take for the learning effect to reach the steady state.
5. The process is repetitive