Delroads Electronics Ltd (DEL) produces a variety of products including an electronic

navigational unit for use in ships. Construction of the unit is a delicate assembly operation

by a team of highly skilled operatives. Components used in the unit are purchased from

outside manufacturers. The unit is sold in relatively small numbers, and a new model is produced

each year.

Costs associated with production of the 20X9 model of the unit are:

Fixed costs       £35,000

Variable costs     £20 wages per labour hour worked, plus £20 materials per unit

Production of the first unit of the 20X9 model will take 60 labour hours, and work of

the operatives is known to be subject to an 83 per cent learning curve effect. Learning curve

effects are achieved only within a model.

Market research has forecast that annual sales of the 20X9 model are associated with unit

prices as follows:

1 unit can be sold at unit price                 £10,000

500 units can be sold at unit price          £327.80

(a) Explain what a learning curve effect is, and suggest reasons for the effect in this particular case.

(b) Draw a diagram (accurately to scale) on the graph paper supplied, demonstrating the

relationship between units of output, total costs and total revenues in respect of the 20X9 model. Set out sufficient workings to justify your diagram.

(c) Use your diagram and supporting workings to identify the profit-maximising units of output and unit price in respect of the 20X9 model.