PART A

1. ABC Corporation is buying a new part produced by a process that has traditionally had an 85% learning curve. A buyer’s initial order was for 8 units and the price quoted per unit was $220. The buyer has done some research and found out that the time to complete each unit in the initial order was 6 hours and the labor cost per hour (worker’s pay per hour) is $8. Based on this information and some additional research the buyer now has the following per unit cost data:

Material $80
Direct labor $48 (Six hours at $8 per hour)
Overhead $48 (assumes 100% of direct labor)
Total Costs $176
Profit (25%) $ 44
Total per unit $220 (quoted price)

The buyer would like to buy an additional 56 units (that is 64 units total).

a. What is the average labor hours/unit for the combined order of 64 units? Round your answer to 2 decimal places. (6 points)

b. How much should the buyer expect to pay per unit for the additional 56 units given that this is a new product and there are some expected learning curve benefits?

c. How much did the buyer save per unit?

2. Discuss why it is important for a buyer to have knowledge of a supplier’s learning rate when preparing to negotiate a purchase contract.

3. China, India, Eastern Europe and other developing countries have been sourcing hot spots.

a. Explain why
b. Discuss any problems you see in sourcing from these low cost countries.