Learning Curve

What is Learning Curve?

 Learning curve demonstrates that over

a period time, there is an increase in productivity
but with diminishing rate as production
increases. Therefore, if the rate of reduction is
20% than the learning curve is referred as 80%
learning curve. Research has shown that as
production quantities double over a period of
time, the average time decreases by 20% for
immediate production unit.

 Learning curves are also known as experience

curve, cost curves, efficiency curves and productivity
curves. It is based on the simple idea that the time required to perform a task decreases as a
worker gains experience. The basic concept is that the time, or cost, of performing a task (e.g.,
producing a unit of output) decreases at a constant rate as cumulative output doubles.

 As a firm produces successive lots of output over various periods of time, it learns to produce
more with a given quantity of resources or it is capable of producing a given output by using
lesser quantities of inputs or resources than before.

 More specifically, it is derived from statistical findings that as cumulative production doubles,
cumulative average time required per unit will be reduced by some constant percentage

 It is important to recognize that the learning curve is not a cost reduction technique.

 Learning curve is relevant in taking following decision:

 Pricing decision based on estimation of future costs.

 Workforce schedule based on future requirements.

 Capital requirement projections

 Set-up of incentive structure

The learning curve effect is usually expressed as a constant

percentage. This percentage represents the proportion by which cost per unit of output declines with
the increase in cumulative output in each successive time period.
 Cost-Volume-Profit
Analysis
Definition

Is used to determine how changes in costs and volume affect a

company’s operating income and net income. In performing this
analysis, there are several assumptions made, including: Sales price per
unit is constant
Study of mathematical relationship between costs and sales revenue
under a given set of assumptions regarding the firm’s fixed cost and
variable costs.
Objectives
To determine number of products that must be sold at the given price
to cover the costs
It can also known as Break-even Analysis
In Performing this analysis, there are several assumptions made:
1. All cost can be categorized as variable or fixed
2. Sales price per unit, variable cost per unit and total fixed cost are
constant
3. All units produced are sold
Key calculations when using CVP Analysis
1. Contribution Margin
Represents the amount of income or profit the company made
before deducting its fixed costs or the amount of sales available to
cover or contribute to fixed costs.

2. Contribution Margin Ratio

When calculated as a ratio, it is the percent of sales available to
cover fixed costs.
Illustration:
If the Three M’s, Inc., has sales of P750,000 and total variable
costs of P450,000. Assuming that the company sold 250,000 units
during the year, the per unit sales price is P3.00 and the total
variable cost per unit is P1.80. The contribution margin amounts
to?
Formula for Contribution Margin
Contribution Margin= Sales Revenue – All Variable Costs
 Contribution Margin Ratio
To calculate the contribution margin ratio, the contribution margin is
divided by the sales or revenues amount.
Computation

Illustration
Using the data from the previous example, what level of sales would be
required if the company wanted P60,000 of income? The P60,000 of
income required is called the targeted income. The required sales level
is P900,000 and the required sales level is 300,000.
Solution
 Breakeven Point
• Usually means the business volume that balances total cost with
total gains
• The point at which total of fixed and variable cost of a business
becomes equal to its total revenue.
Break-even point in pesos

Break-even
= Total Fixed Costs = P300,000 = P750,000
Sales Pesos Contribution Margin Ratio 40%

Break-even in units

Break-even Total Fixed Costs P300,000

= = = 250,000 units
Sales Units Contribution Margin Per Unit P1.20