Problem 75 Learning Curves Suppose you have a production tec

Problem 7-5 Learning Curves: Suppose you have a production technology that can be characterized by a leraning curve. Every time you increase production by one unit, your costs decrease by $6. The first unit cost you $64 to produce.

If you receive a request for proposal (RFP) on a project for 4 units, wat 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

At break-even price, Price = Total cost.

Total cost of producing 4 units = $[64 + (64 - 6) + (64 - 12) + (64 - 18)] = $220

So, breakeven price for 4 units = $220

Next, if I produce 2 more units, Total cost = $[(64 - 18 - 6) + (64 - 18 - 6 - 6)]

= $74

Therefore, breakeven price for 5th & 6th unit (combined) = $74