Evans the Steam’ has set up a new business and secured a contract to build 32 locomotives for mountain railways, which are being reopened as tourist attractions. The order is to be fulfilled in two batches of 16. The first locomotive takes 30 days to assemble with seven people working full time on it. The daily rate for a locomotive fitter is £80 and the overheads are estimated to be 50 per cent on top of the labour rate. Evans is confident that an 80 per cent learning curve is possible. The first batch has been priced with a labour estimate of £16000 per locomotive and the last 16 with a labour cost of £10000. Comment on the pricing of the labour content and show whether the rates per locomotive are sufficient to cover the likely actual costs.
Total cost per locomotive is:
80×7×30×1.5 = £25200.
So, the rates per locomotive of £16000 and £10000 are insufficient to cover the likely actual costs of £25200.