Given a 75% experience curve, if unit cost is $32 with cumulative production of 600,000, what will it be when cumulative production doubles to 1.2 million units?A. $24B. $28C. $32D. $64

The unit cost will be:

A. $24.

Explanation:

a) Data and Calculations:

Experience curve = 75%

Unit cost = $32

Cumulative production units = 600,000

New cumulative production units = 1,200,000

The new unit cost will reduce to $24 ($32 * 75%).

b) The experience curve is the explanation for the fall in the unit cost of production resulting from the doubling of the cumulative production units.  Each time cumulative volume doubles, the value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant percentage.  This is caused by the increased experience which the company has acquired as a result of the improved production activities.

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