9 Quantitative analysis

Question 1

What are the advantages of high/low method?

Answer 1

• The high-low method has the enormous advantage of simplicity
• It is easy to understand and easy to use

Question 2

What are the disadvantages of high/low method?

Answer 2

• It assumes that activity is the only factor affecting costs
• It assumes that historic costs reliably predict future costs
• It uses only two values, the highest and the lowest which may be distorted due to random variations.

Question 3

What does Wrights Law state?

Answer 3

States that as cumulative output double, the cumulative average time per unit falls to a fixed percentage of the previous average time.

Question 4

What is the official definition of the learning curve?

Answer 4

The mathematical expression of the commonly
observed effect that, as complex and labour
intensive procedures are
repeated, unit labour times tend to decrease.

Question 5

What is the limitations of the Learning Curve Model

Answer 5

• The process needs to be labour intensive
• The product needs to be new
• The product is complex
• Production is repetitive and there is no breaks in production

Question 6

What is the formula for the learning curve?

Answer 6

Y= a * xB
X= Cumulative number of units
Y = Cumulative average time per unit to produce X units
A = Time required for first unit
b = index of learning = logr/log 2

Question 7

What is the applications of the learning effect?

Answer 7

• Pricing decisions - prices will be set too high if based of the costs of making the first few
• Work scheduling - less labour per unit will be required.
• Standard setting - if a product enjoys a learning cost than the standard will be too high.
• Budgeting - the presence of a learning effect should be taken into account when setting budgets