How to approach it
- Strip wastage out of the first batch's material cost to find the base cost, then rebuild each batch with its own wastage rate.
- Learning curve on batches: cumulative average per batch × batches, then take differences to get each batch's time.
- Once learning stops, later batches take the same time as the last 'learning' batch.
- Total revenue, variable costs, contribution, then compare the margin with the policy minimum.
Key rules to apply
- Cost including x% wastage ÷ (1 + x%) = cost before wastage.
- Reducing the wastage rate by 10% means applying it to the wastage percentage, not to the whole material cost.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Multiplying by 95% instead of dividing by 105% to remove wastage (examiners' point).
- Applying the learning curve to batches after it was said to stop.
- Not computing the contribution margin % before concluding.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q6 without copying it.
Original practice question
Special order with learning and wastage
An order for 4,000 units at Rs 20,000 each would be made in 8 batches of 500. Batch 1 takes 2,000 hours; an 85% learning curve applies (b = −0.2345) up to batch 4, and later batches take as long as batch 4. Labour costs Rs 500/hour; variable overhead Rs 300/hour. Material is Rs 15,000 per unit before wastage; wastage is 5% in batch 1 and falls by 20% each batch until batch 3, then stays at that rate. The company needs at least a 25% contribution margin.
Required: Should the order be accepted?
Worked solution
| Labour | Hours |
|---|---|
| Batches 1–4: 4 × 2,000 × 4^−0.2345 | 5,780.0 |
| Batch 4 alone: 5,780.0 − 3 × 2,000 × 3^−0.2345 | 1,142.5 |
| Batches 5–8: 4 × 1,142.5 | 4,570.0 |
| Total hours | 10,350.0 |
| Order | Rs m |
|---|---|
| Revenue: 4,000 × 20,000 | 80.00 |
| Material: 7.5m per batch × (8 + 0.05 + 0.04 + 6 × 0.032) | (62.12) |
| Labour: 10,350 × 500 | (5.18) |
| Variable overhead: 10,350 × 300 | (3.11) |
| Contribution | 9.60 |
| Contribution margin | 12.0% |
Answer: Reject: a 12% margin is below the 25% minimum.