Assume the same information for Northern Defense as in Exercise 10-33, except that Northern

Defense uses an 85% incremental unit-time learning model as a basis for predicting direct
manufacturing labor-hours. (An 85% learning curve means b = –0.234465.)

Required:
1. Calculate the total variable costs of producing 2, 3, and 4 units.
2. If you solved Exercise 10-33, compare your cost predictions in the two exercises for 2 and 4
units. Why are the predictions different? How should Northern Defense decide which model it
should use?

SOLUTION

(20 min.)  Learning curve, incremental unit-time learning model.

1. The direct manufacturing labor-hours (DMLH) required to produce the first 2, 3, and 4
units, given the assumption of an incremental unit-time learning curve of 85%, is as follows:

85% Learning Curve

Cumulative 
Number of Units Individual Unit Time for Xth Unit Cumulative Total Time:
(X) (y): Labor Hours Labor-Hours
(1) (2) (3)
 1 4,400 4,400
 2 3,740 = (4,400 0.85) 8,140
 3 3,401 11,541
 4 3,179 = (3,740 0.85) 14,720

Values in column (2) are calculated using the formula y = aX where a = 4,400, X = 2, 3,
b

or 4, and b = – 0.234465, which gives

when X = 2,  y = 4,400 × 2 = 3,740
– 0.234465

when X = 3,  y = 4,400 × 3 = 3,401

– 0.234465

when X = 4,  y = 4,400 × 4 = 3,179

– 0.234465

Variable Costs of Producing

2 Units 3 Units 4 Units
Direct materials $84,000 × 2; 3; $168,000 $   $   336,000
4 252,000
Direct manufacturing labor 219,780      397,440
   $27 × 8,140; 11,541; 14,720      311,60
Variable manufacturing overhead    105,820 7      191,360
   $13 × 8,140; 11,541; 14,720 $493,600 $924,800
Total variable costs      150,03
3
$713,640

2. Variable Costs of Producing

2 Units 4 Units
 Incremental unit-time learning model (from requirement 1) $493,600 $924,800
Cumulative average-time learning model (from Exercise 10-   467,200 844,640
34) $  26,400 $ 80,160
Difference

Total variable costs for manufacturing 2 and 4 units are lower under the cumulative
average-time learning curve relative to the incremental unit-time learning curve. Direct
manufacturing labor-hours required to make additional units decline more slowly in the
incremental unit-time learning curve relative to the cumulative average-time learning curve when
the same 85% factor is used for both curves. The reason is that, in the incremental unit-time
learning curve, as the number of units double only the last unit produced has a cost of 85% of the
initial cost. In the cumulative average-time learning model, doubling the number of units causes
the average cost of all the units produced (not just the last unit) to be 85% of the initial cost.

10-35 High-low method. Ken Howard, financial analyst at KMW Corporation, is examining
the behavior of quarterly maintenance costs for budgeting purposes. Howard collects the
following data on machinehours worked and maintenance costs for the past 12 quarters:

Quarte Machine-Hours Maintenance Costs

r
1 100,000 $205,000
2 120,000 240,000
3 110,000 220,000
4 130,000 260,000
5 95,000 190,000
6 115,000 235,000
7 105,000 215,000
8 125,000 255,000
9 105,000 210,000
10 125,000 245,000
11 115,000 200,000
12 140,000 280,000

Required:
1. Estimate the cost function for the quarterly data using the high-low method.
2. Plot and comment on the estimated cost function.
3. Howard anticipates that KMW will operate machines for 100,000 hours in quarter 13. Calculate
the predicted maintenance costs in quarter 13 using the cost function estimated in requirement 1.