A company has developed a new product which it will launch next month. During the initial production phase the company expects to produce 6,400 units in batches of 100 units. The first batch to be produced is expected to require 25 hours of direct labour. The following details are expected to apply throughout the initial production phase:
• Direct material cost per unit is expected to be $4 • Direct labour is to be paid $10 per hour • A 90% learning curve is expected to apply • Other variable costs are expected to be $2 per unit
(a) Calculate the total variable cost of the 6,400 units of the new product.
(a) $ Direct material (6,400 units x $4) 25,600 Direct labour (see below) 8,503 Other variable costs (6,400 units x $2) 12,800 46,903 Direct labour: The time taken is expected to be: Y=ax^{b} = 25 x 64 ^{-0.1520} = 13.286 hours per batch, which is a total of 850.32 hours for 64 batches 850.32 hours x $10 per hour = $8,503.20