2 Lambda Computer Products competed for and won a contract to produce two protot

Question

2 Lambda Computer Products competed for and won a contract to produce two prototype units of a new type of computer that is based on laser optics rather than on electronic binary bits. The first unit produced by Lambda took 5,000 hours to produce and required $250,000 worth of material, equipment usage, and supplies. The second unit took 3,000 hours and used $175,000 worth of materials, equipment usage, and supplies. Labor is $30 per hour. Use Exhibit 6.5. 5 points a. Lambda was asked to present a bid for 10 additional units as soon as the second unit was completed. Production would start immediately. What would this bid be? Cost for 10 more units eBook

Explanation / Answer

Learning rate for hours of production = Time for Unit 2/Time for Unit 1 = 3000/5000 = 0.6 or 60%

Learning rate for material & equipment usage = Cost for Unit 2/Cost for Unit 1 = 175000/250000 = 0.7 or 70%

Value for Unit n = Value for unit 1*Cumulative Improvement factor basis Learning rate %

The bid is to be made for additional 10 units. As 2 are already produced, the total units is 12

So, Time for 12 units = Time for 1st unit*Cumulative value at 60% = 5000*4.144 = 20720 hours

Time required for next 10 units = Time for 12 units - Time for 1st unit - Time for 2nd unit = 20720 - 5000 - 3000 = 12720 hours

Labor rate is 30$ per hour

Total Labor cost = Labor rate*Time required = 30*12720 = 381,600 hours

Material, equipment cost for 12 units = Cost for 1st unit*Cumulative value at 70% = 250000*5.501 = 1375250

Material for next 10 units = Cost for 12 units - cost for 1st unit - cost for 2nd unit = 1375250 - 250000 - 175000 = 950250

Total cost = Labor cost + Material cost = 381600+950250 = 1,331,850$

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