You are a consultant called in to estimate the costs after the employees learn how to do a job more efficiently by repetition of new product. You find a company can produce a product the first time at a cost of $5,000. If their 90 percent learning curve allows them to reduce their costs on each unit, what is the total cost of producing 100 units of the new product?
A) $500,000
B) $390,000
C) $290,700
D) $250,687
E) $250,000

Question

Quizplus · Accepted Answer

Using the 90% learning curve, we can calculate the cost per unit after producing the first unit as follows:
For the 2nd unit: (90% of $5,000) = $4,500
For the 3rd unit: (90% of $4,500) = $4,050
For the 4th unit: (90% of $4,050) = $3,645
And so on...
To find the total cost of producing 100 units, we need to add up the costs of producing each unit from 1 to 100. This can be done using the following formula:
Total cost = (cost of the first unit) x [(1 - learning rate)^log(number of units produced)]
Total cost = $5,000 x [(1 - 0.90)^log(100)]
Total cost = $290,700 
Therefore, the best choice is C, with a total cost of producing 100 units of $290,700.

You Are a Consultant Called in to Estimate the Costs