Learning Curves

Modern Merchandise, Inc., makes and markets do-it-yourself hardware, housewares, and industrial products. The company's new Aperture Miniblind is winning cus- tomers by virtue of its high quality and quick order turnaround time. The product also benefits because its price point bridges the gap between ready-made vinyl blinds and their high-priced custom counterpart. In addition, the company's expanding product line is sure to benefit from cross-selling across different lines. Given the success of the Aperture Miniblind product, Modern Merchandise plans to open a new production facility near Beaufort, South Carolina. Based on information provided by its chief financial officer, the company estimates fixed costs for this product of $50,000 per year and average variable costs of

AVC  =  $0.5  +  $0.0025Q

where AVC is average variable cost (in dollars) and Q is output.

A. Estimate total cost and average total cost for the projected first-year volume of 20,000 units.

B. An increase in worker productivity because of greater experience or learning during the course of the year resulted in a substantial cost saving for the company. Estimate the effect of learning on average total cost if actual second-year total cost was $848,000 at an actual volume of 20,000 units.