Your firm designs PowerPoint slides for computer training classes, and you have
ID: 468318 • Letter: Y
Question
Your firm designs PowerPoint slides for computer training classes, and you have just received a request to bid on a contract to produce the slides for an eight-session class. From previous experience, you know that your firm follows an 85 percent learning rate. For this contract it appears the effort will be substantial, running 50 hours for the first session. Your firm bills at a rate of $100/hr and the overhead is expected to run a fixed $600 per session. The customer will pay you a flat fixed rate per session. If your nominal profit margin is 20 percent, what will be the total bid price, the per session price, and at what session will you break even?
Need to use learning curve and an excel spreadsheet:
It takes 50 hrs to create the first session. With a learning rate of 0.85. Need to calculate “r,” use log(0.85)/log(2). Also remember that T1 is 50 hrs. So for session 2 you would say the labor (T2) is 50 hrs x 2 ^ r = 42.5 hrs. The rest of the sessions will follow the same pattern (Make sure you repeat using T1 for your equation). List costs per each session in the following columns (Sessions Number)(Hrs.)(labor Costs)(Session Costs)(Profit)(Total Cost of Session). Make sure you answer all of the questions (bid price, per session price and when you will breakeven). Remember breakeven point is when a business can cover all its expenses and begin to make profit.
Explanation / Answer
The learning curve formula will be used in this problem. The formula is: TN = T1*(Nb) where TN = hours required for the nth session, T1 = hours required for first session, N = the session number and b = log0.85/log 2) [log of learning rate/log 2]
Thus b = log0.85/log 2 = -0.07058/0.3010299 = -0.234465
Now no. of hours for 3rd session = 50*(3^-2.34465) = 38.64574. For 4th session = 50*(4^-2.34465) = 36.125 and so on.
Thus total time for 8 sessions = 296.7922 hours.
Total variable costs = number of total hours*billing rate per hour = 296.7922 hours*$100 per hour = $29,679.2249
Total fixed costs = fixed cost per session*number of sessions = $600*8 = $4,800
Total costs = total variable costs+total fixed costs = $29,679.2249+$4,800 = $34,479.2249
Profit margin = 20%. Thus bid price = total cost*(1+profit margin) = $34,479.2249*1.2 = $41,375.07. This is the total bid price.
Per session price = total price/8 = 41375.07/8 = $5,171.88. This is the flat fixed rate per session.
Breakeven = fixed cost/(price per session - variable cost per session)
Fixed cost = 4800 (as calculated earlier). price per session = 5171.88. Variable cost per session (average) = total variable cost/8 = $29,679.2249/8 = 3709.903
Breakeven = Fixed costs/(revenue per session - variable cost per session)
= 4800/(5171.88-3709.903)
= 4800/1461.9806
= 3.28
This is the breakeven session where all expenses are covered and profits begin.
Session N N^b 50*(N^b) 1 1 1.0000 50.0000 2 2 0.8500 42.5000 3 3 0.7729 38.6457 4 4 0.7225 36.1250 5 5 0.6857 34.2836 6 6 0.6570 32.8489 7 7 0.6337 31.6828 8 8 0.6141 30.7063 Total time 296.792249Related Questions
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