The overhead costs for a company are presently SX per month. The management team

Question

The overhead costs for a company are presently SX per month. The management team of the company, in cooperation with the employees, is ready to implement a comprehensive improvement program to reduce these costs. If you (a) consider an observation of actual overhead costs for one month analogous to an output unit, (b) estimate the overhead costs for the first month of program implementation to be 1.2X due to extra front-end effort, and (c) consider a 86% improvement curve applicable to the situation, what is your estimate of the percentage reduction in present overhead costs after 28 months of program implementation? The percentage reduction in present overhead costs per month after 28 months of the program implementation is %. Round to one decimal place.)

Explanation / Answer

From the problem introduction, we know that

:K=1.25X

s=0.85

Thus we have that

n=log0.85 / log2

= -0.234

Apply the learning-curve model in Eq.

Z36= 1.25X * 36-0.234= 0.54X

Thus the cost reduction by the program is

(1-0.54)=46%.

46%

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