#4. Using the k value (lec 18, #14) for MH’s learning rate, what are the values for T1 and T5000?

Disney is looking to produce 5,000 units of a high quality, limited edition Elsa doll (retails for $79.95). Your company, MagicHappens, has completed a few similar collectible-quality doll projects in the past, but those orders were in the tens or low hundreds units at most.

MagicHappens has all the capabilities to produce the doll – apart from two steps found to be not worth doing: producing the base doll and the fabric. For each highly-detailed doll, MH can expect to pay just $2 to the supplier due to economies of scale. If MH makes the doll in-house, each ‘base’ doll would cost around

$50

. Therefore, MH always procure the base doll and fabric, and then perform the sewing, assembly, packaging, and distribution to Disney.

Disney is conducting an open bid process for making this doll. The current best bid for the 5,000 dolls contract is $155,000. You are deciding whether you can beat the current bid, and in your hand is a piece of note given to you by the production team that reads:

T1

?

T50

T100

T200

T5000

?

$50

$45

$40.5

1) If T100 stands for the total cost of producing unit number 100 of a comparable doll, what learning rate (nearest 5%) best fits the data you have in hand? Hint: You can use either time or cost for the learning curve equations.

2) Using the k value (lec 18, #14) for MH’s learning rate, what are the values for

T1

and T5000?

3) How much is the current best bid in terms of average per-unit cost? Will your average per-unit cost be lower than theirs?

The following questions refer to MH’s relationship with its supplier for base doll and fabric.

4) Now assume if your bid was accepted, you then have to draw up a contract with your base doll and fabric supplier. MH’s priorities are cost > time > quality, in that order. You wish to setup a contract that minimizes risk on your end, while still financially motivating the supplier to perform better than agreed upon goals. Which contract type should be used here?

5) The agreed-upon cost for the base doll and fabric is $3 for each of the 5,000 dolls. Target profit is 10% of the total target cost. Any cost savings will be shared equally between you and the supplier. Assuming the supplier delivered all materials on time and in good quality at a final project cost of $12,000. How much do you pay the supplier?