Learning curves Suppose you have a production technology tha

Learning curves: Suppose you have a production technology that can be characterized by a learning curve. Every time your increase production by one unit, your cost decrease by $6.00. The first unit costs you $64.00 to produce. If you receive a request for proposal (RFP) on a project for four units, what is your break-even price? Suppose that if you get the contract, you estimate that you can win another project for two more units. Now what is your break-even price for those two units?

Solution

Learning Curve:

                The term learning curve is used in two main ways: where the same task is repeated in a series of trials, or where a body of knowledge is learned over time.

A learning curve is a graphical representation of the increase of learning (vertical axis) with experience (horizontal axis).

Learning curve for a single subject, showing how learning improves with experience

The first unit costs you $64.00 to produce

Cost decreasing by $6.00

If receive RFP on a project for 4 units

What is the Break-even price per units?

For 4 Units of Cost is:
                = ($64 + $58 + $52 + $46) = $ 220
                = ($220 / 4) = $55

Break-even price per unit is: $55
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Two more units of Cost is:
                = ($40 + $34) = $ 74
                = ($ 74 / 2) = $ 37

The break-even price for two more units is: $37

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