Learning Curves

17 - 1
Learning Curves
Chapter 17
17 - 2
Learning Curve Analysis
Developed as a tool to estimate the recurring costs in a
production process
recurring costs: those costs incurred on each unit of
production
Dominant factor in learning theory is direct labor
based on the common observation that as a task is
accomplished several times, it can be be completed in
shorter periods of time
each time you perform a task, you become better at
it and accomplish the task faster than the previous
time
Other possible factors
management learning, production improvements such as
tooling, engineering
17 - 3
Learning Theory
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17 - 4
Log-Log Plot of Linear Data
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17 - 5
Linear Plot of Log Data
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17 - 6
Learning Theory
Two variations:
Cumulative Average Theory
Unit Theory
17 - 7
If there is learning in the production process, the
cumulative average cost of some doubled unit equals the
cumulative average cost of the undoubled unit times the
slope of the learning curve
Described by T. P. Wright in 1936
based on examination of WW I aircraft production costs
Aircraft companies and DoD were interested in the regular
and predictable nature of the reduction in production costs
that Wright observed
implied that a fixed amount of labor and facilities would
produce greater and greater quantities in successive
periods
17 - 8
Unit Theory
If there is learning in the production process, the cost of
some doubled unit equals the cost of the undoubled unit
times the slope of the learning curve
Credited to J. R. Crawford in 1947
led a study of WWII airframe production commissioned
by USAF to validate learning curve theory
17 - 9
Basic Concept of Unit Theory
As the quantity of units produced doubles, the cost
1
to
produce a unit is decreased by a constant percentage
For an 80% learning curve, there is a 20% decrease in
cost each time that the number of units produced
doubles
the cost of unit 2 is 80% of the cost of unit 1
the cost of unit 4 is 80% of the cost of unit 2
the cost of unit 8 is 80% of the cost of unit 4, etc.
1
The Cost of a unit can be expressed in dollars, labor hours, or other units of measurement.
17 - 10
80% Unit Learning Curve
100
66.92
54.98
44.638
80
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0 0.5 1 1.5
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17 - 11
Unit Theory
Defined by the equation Y
x
= Ax
b

where
Y
x
= the cost of unit x (dependent variable)
A = the theoretical cost of unit 1 (a.k.a. T1)
x = the unit number (independent variable)
b = a constant representing the slope (slope = 2
b
)

17 - 12
Learning Parameter
In practice, -0.5 < b < -0.05
corresponds roughly with learning curves between 70%
and 96%
learning parameter largely determined by the type of
industry and the degree of automation
for b = 0, the equation simplifies to Y = A which means
any unit costs the same as the first unit. In this case,
the learning curve is a horizontal line and there is no
learning.
referred to as a 100% learning curve

17 - 13
Learning Curve Slope versus
the Learning Parameter
As the number of units doubles, the unit cost is reduced by
a constant percentage which is referred to as the slope of
the learning curve
Cost of unit 2n = (Cost of unit n) x (Slope of learning curve)

Taking the natural log of both sides:
ln (slope) = b x ln (2)
b = ln(slope)/ln(2)
For a typical 80% learning curve:
ln (.8) = b x ln (2)
b = ln(.8)/ln(2)

Slope of learning curve
Cost of unit n
Cost of unit n
A n
A n
b
b
b
= = =
2 2
2
( )
( )
17 - 14
Slope and 1st Unit Cost
To use a learning curve for a cost estimate, a slope and 1st
unit cost are required
slope may be derived from analogous production
situations, industry averages, historical slopes for the
same production site, or historical data from previous
production quantities
1st unit costs may be derived from engineering
estimates, CERs, or historical data from previous
17 - 15
from Historical Data
When historical production data is available, slope and 1st
unit cost can be calculated by using the learning curve
equation
Y
x
= Ax
b
take the natural log of both sides:
ln (Y
x
) = ln (A) + b ln (x)
rewrite as Y = A + b X and solve for A and b using
simple linear regression
A = e
A

no transformation for b required
17 - 16
Example
Given the following historical data, find the Unit learning
curve equation which describes this production
environment. Use this equation to predict the cost (in
hours) of the 150th unit and find the slope of the curve.
Unit # Hours Ln (X) Ln (Y)
(X) (Y) X' Y'
5 60 1.60944 4.09434
12 45 2.48491 3.80666
35 32 3.55535 3.46574
125 21 4.82831 3.04452
b = -0.32546 =SLOPE($E$3:$E$6,$D$3:$D$6)
A' = 4.618 =INTERCEPT($E$3:$E$6,$D$3:$D$6)
A = 101.298 =EXP(4.618)
17 - 17
Example
Or, using the Regression Add-In in Excel...
Regression Statistics
Multiple R 1.0000
R Square 0.9999
Adjusted R Square 0.9999
Standard Error 0.0042
Observations 4
ANOVA
df SS MS F Significance F
Regression 1 0.614 0.614 35482.785 2.818E-05
Residual 2 0.000 0.000
Total 3 0.614
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 4.618 0.006 799.404 0.000 4.593 4.643
LN(Unit No.) -0.325 0.002 -188.369 0.000 -0.333 -0.318
17 - 18
The equation which describes this data can be written:
Y
x
= Ax
b

A = e
4.618
= 101.30
b = -0.32546
Y
x
= 101.30(x)
-0.32546

Solving for the cost (hours) of the 150th unit
Y
150
= 101.30(150)
-0.32546

Y
150
= 19.83 hours
Slope of this learning curve = 2
b
slope = 2
-0.32546
= .7980 = 79.8%
Example
17 - 19
Estimating Lot Costs
After finding the learning curve which best models the
production situation, the estimator must now use this
learning curve to estimate the cost of future units.
Rarely are we asked to estimate the cost of just one
unit. Rather, we usually need to estimate lot costs.
This is calculated using a cumulative total cost equation:

where CT
N
= the cumulative total cost of N units

CT
N
may be approximated using the following equation:

(
= + + + =

=
N
x
b b b b
N
x A N A A A CT
1
) ( ) 2 ( ) 1 (
1
) (
1
+
~
+
b
N A
CT
b
N
17 - 20
Compute the cost (in hours) of the first 150 units from the
previous example:

To compute the total cost of a specific lot with first unit #
F and last unit # L:
approximated by:

hrs
b
A
CT
b
4 . 4417
1 325 . 0
) 150 )( 3 . 101 (
1
) 150 (
1 325 . 0 1
150
=
+
=
+
=
+ +
(
=

= =
1
1 1
,
F
x
b
L
x
b
L F
x x A CT
1
) 1 (
1
1 1
,
+
+
~
+ +
b
F A
b
AL
CT
b b
L F
17 - 21
Compute the cost (in hours) of the lot containing units 26
through 75 from the previous example:
hrs CT
b
L
F
A
b
F A
b
AL
CT
b b
L F
8 . 1448
1 325 . 0
) 1 26 )( 3 . 101 (
1 325 . 0
) 75 )( 3 . 101 (
325 . 0
75
26
3 . 101
1
) 1 (
1
1 325 . 0 1 325 . 0
75 , 26
1 1
,
=
+

+
~
=
=
=
=
+
+
~
+ +
+ +
= -
17 - 22
Fitting a Curve Using Lot Data
Cost data is generally reported for production lots (i.e., lot
cost and units per lot), not individual units
Lot data must be adjusted since learning curve
calculations require a unit number and its associated
unit cost
Unit number and unit cost for a lot are represented by
algebraic lot midpoint (LMP) and average unit cost (AUC)
17 - 23
The Algebraic Lot Midpoint (LMP) is defined as the
theoretical unit whose cost is equal to the average unit cost
for that lot on the learning curve.
Calculation of the exact LMP is an iterative process. If
learning curve software is unavailable, solve by
approximation:
For the first lot (the lot starting at unit 1):
If lot size < 10, then LMP = Lot Size/2
If lot size > 10, then LMP = Lot Size/3
For all subsequent lots:

lot. a in number unit last the L
and lot, a in number unit first the F
where
4
2
=
=
+ +
=
FL L F
LMP
17 - 24
The LMP then becomes the independent variable (X) which
can be transformed logarithmically and used in our simple
linear regression equations to find the learning curve for
our production situation.
The dependent variable (Y) to be used is the AUC which can
be found by:

The dependent variable (Y) must also be transformed
logarithmically before we use it in the regression equations.
Size Lot
Cost Lot Total
AUC =
17 - 25
Example
Given the following historical production data on a tank
turret assembly, find the Unit Learning Curve equation
which best models this production environment and
estimate the cost (in man-hours) for the seventh production
lot of 75 assemblies which are to be purchased in the next
fiscal year.
Lot # Lot Size Cost (man-hours)
1 15 36,750
2 10 19,000
3 60 90,000
4 30 39,000
5 50 60,000
6 50 in process, no data available
17 - 26
Solution
The Unit Learning Curve equation:
Y
x
= 3533.22x
-0.217

Lot # Lot Size Cost Cum Qnty LMP AUC ln (LMP) ln (AUC)
1 15 36,750 15 5.00 2450 1.609 7.804
2 10 19,000 25 20.25 1900 3.008 7.550
3 60 90,000 85 51.26 1500 3.937 7.313
4 30 39,000 115 99.97 1300 4.605 7.170
5 50 60,000 165 139.42 1200 4.938 7.090
6 50 ? 215
b = -0.217
A' = 8.17 A = 3533.22
slope = 2
b
= 2
-0.217
= .8604 = 86.04%
17 - 27
Solution
To estimate the cost (in hours) of the 7th production lot:
the units included in the 7th lot are 216 - 290
hrs CT
b
L
F
A
b
F A
b
AL
CT
b b
L F
7 . 866 , 79
1 217 . 0
) 1 216 )( 22 . 3533 (
1 217 . 0
) 290 )( 22 . 3533 (
217 . 0
290
216
22 . 3533
1
) 1 (
1
1 217 . 0 1 217 . 0
290 , 216
1 1
,
=
+

+
~
=
=
=
=
+
+
~
+ +
+ +
17 - 28
As the cumulative quantity of units produced doubles, the
average cost of all units produced to date is decreased by a
constant percentage
For an 80% learning curve, there is a 20% decrease in
average cost each time that the cumulative quantity
produced doubles
the average cost of 2 units is 80% of the cost of 1
unit
the average cost of 4 units is 80% of the average cost
of 2 units
the average cost of 8 units is 80% of the average cost
of 4 units, etc.
17 - 29
Cumulative Average
Learning Theory
Defined by the equation Y
N
= AN
b

where
Y
N
= the average cost of N units
A = the theoretical cost of unit 1
N = the cumulative number of units produced
b
)

Used in situations where the initial production of an item is
expected to have large variations in cost due to:
use of soft or prototype tooling
inadequate supplier base established
early design changes
short lead times
This theory is preferred in these situations because the
effect of averaging the production costs smoothes out
initial cost variations.
17 - 30
80% Cumulative Average Curve
100
64
51.2
40.96
80
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$80.00
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$120.00
0 2 4 6 8 10 12 14 16
Cum Qty
Cum Avg Cost
$0.00
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$1.00
$1.50
$2.00
$2.50
0 0.5 1 1.5
Log Cum Qty
Log
Cum Avg Cost
17 - 31
Learning Curve Slope versus
the Learning Parameter
As the number of units doubles, the average unit cost is
reduced by a constant percentage which is referred to as
the slope of the learning curve
Average Cost of units 1 thru 2n
= Slope of learning curve x Average Cost of units 1 thru n

Taking the natural log of both sides:
ln (slope) = b x ln (2)
b=ln(slope)/ln(2)
Slope of LC
Avg Cost of units thru n
Avg Cost of units thru n
A n
A n
b
b
b
= = =
1 2
1
2
2
( )
( )
17 - 32
To use a learning curve for a cost estimate, a slope and 1st
unit cost are required
slope may be derived from analogous production
situations, industry averages, historical slopes for the
same production site, or historical data from previous
1st unit costs may be derived from engineering
estimates, CERs, or historical data from previous
17 - 33
from Historical Data
When historical production data is available, slope and 1st
unit cost can be calculated by using the learning curve
equation
Y
N
= AN
b
take the natural log of both sides:
ln (Y
N
) = ln (A) + b ln (N)
rewrite as Y = A + b N and solve for A and b using
simple linear regression
A = e
A

no transform for b required
17 - 34
The equation which best fits this data can be written:
Y
x
= 12.278(N)
-0.33354

Slope of this learning curve = 2
b
slope = 2
-0.33354
= .7936
Lot Cum Cum Cum Avg Ln (N) Ln (Y)
Lot Qnty Cost ($M) Qnty (N) Cost Cost (Y) N' Y'
22 98 22 98 4.455 3.09104 1.49393
36 80 58 178 3.069 4.06044 1.12134
40 80 98 258 2.633 4.58497 0.96799
40 78 138 336 2.435 4.92725 0.88986
b = -0.33354 =SLOPE($G$3:$G$6,$F$3:$F$6)
A' = 2.5078 =INTERCEPT($G$3:$G$6,$F$3:$F$6)
A = 12.27789 =EXP(2.5078)
Example
17 - 35
Example
Or, using the Regression Add-In in Excel...
SUMMARY OUTPUT
Regressi on Stati sti cs
Multiple R 0.9952
R Square 0.9903
Adjusted R Square 0.9855
Standard Error 0.0323
Observations 4
ANOVA
df SS MS F Si gni fi cance F
Regression 1 0.214 0.214 204.912 0.0048
Residual 2 0.002 0.001
Total 3 0.216
Coeffi ci ents Standard Error t Stat P-val ue Lower 95% Upper 95%
Intercept 2.508 0.098 25.485 0.002 2.084 2.931
N' -0.334 0.023 -14.315 0.005 -0.434 -0.233
17 - 36
The learning curve which best fits the production data must
be used to estimate the cost of future units
usually must estimate the cost of units grouped into a
production lot
lot cost equations can be derived from the basic
equation Y
N
= AN
b
which gives the average cost of N
units
the total cost of N units can be computed by multiplying
the average cost of N units by the number of units N
where CT
N
= the cumulative total cost of N units
the cost of unit N is approximated by (1 + b)AN
b
CT AN N AN
N
b b
= =
+
( )
1
17 - 37
To compute the total cost of a specific lot with first unit #
F and last unit # L:

| |
1 1
1 ,
) 1 (
+ +
= =
b b
F L L F
F L A CT CT CT
17 - 38
Example
Given the following historical production data on a tank
turret assembly, find the Cum Avg Learning Curve equation
which best models this production and estimate the cost (in
man-hours) for the seventh production lot of 75 assemblies
which are to be purchased in the next fiscal year.
Lot # Lot Size Cost (man-hours)
1 15 36,750
2 10 19,000
3 60 90,000
4 30 39,000
5 50 60,000
6 50 in process, no data available
17 - 39
Solution
Lot LN of LN of
Lot # Size Cost Cum Qnty Cum Cost Cum Avg Cost Cum Qnty Cum Avg Cost
1 15 36,750 15 36750 2450.00 2.70805 7.80384
2 10 19,000 25 55750 2230.00 3.21888 7.70976
3 60 90,000 85 145750 1714.71 4.44265 7.44700
4 30 39,000 115 184750 1606.52 4.74493 7.38183
5 50 60,000 165 244750 1483.33 5.10595 7.30205
6 50 ? 215
b = -0.21048
A' = 8.3801 A = 4359.43
slope = 2
b
= 2
-0.21048
= .8643 = 86.43%
The Cum Avg Learning Curve equation:
Y
N
= 4359.43N
-0.21048

17 - 40
Solution
To estimate the cost of the 7th production lot:
the units included in the 7th lot are 216 - 290

| |
| | hrs CT
b
F
L
A
F L A CT
b b
645 , 80 ) 215 ( 290 43 . 4359
2105 . 0
216
290
43 . 4359
) 1 (
1 2105 . 1 2105 . 0
290 , 216
1 1
290 , 216
= =
=
=
=
=
=
+ +
+ +
17 - 41
Unit Versus Cum Avg
1000
1500
2000
2500
0 25 50 75 100 125 150 175 200
Qty
Cost
Cum Avg LC
Unit LC
17 - 42
Unit Versus Cum Avg
3
3.1
3.2
3.3
3.4
3.5
0 0.5 1 1.5 2 2.5
Log Qty
Log Cost
Cum Avg LC
Unit LC
17 - 43
Unit versus Cum Avg
Since the Cum Avg curve is based on the average cost of a
production quantity rather than the cost of a particular
unit, it is less responsive to cost trends than the unit cost
curve.
A sizable change in the cost of any unit or lot of units is
required before a change is reflected in the Cum Avg
curve.
Cum Avg curve is smoother and always has a higher r
2

Since cost generally decreases, the Unit cost curve will
roughly parallel the Cum Avg curve but will always lie
below it.
Government negotiator prefers to use Unit cost curve
since it is lower and more responsive to recent trends
17 - 44
Learning Curve Selection
Type of learning curve to use is an important decision.
Factors to consider include:
Analogous Systems
systems which are similar in form, function, or
development/production process may provide
justification for choosing one theory over another
Industry Standards
certain industries gravitate toward one theory versus
another
Historical Experience
some defense contractors have a history of using one
theory versus another because it has been shown to
best model that contractors production process
17 - 45
Learning Curve Selection
Expected Production Environment
certain production environments favor one theory
over another
Cum Avg: contractor is starting production with
prototype tooling, has an inadequate supplier base
established, expects early design changes, or is
subject to short lead-times
Unit curve: contractor is well prepared to begin
production in terms of tooling, suppliers, lead-
times, etc.
Statistical Measures
best fit, highest r
2
17 - 46
Production Breaks
Production breaks can occur in a program due to funding
delays or technical problems.

How much of the learning achieved has been lost (forgotten)
due to the break in production?
How will this lost learning impact the costs of future
production items?

The first question can be answered by using the Anderlohr
Method for estimating the learning lost.
The second question can then be answered by using the
Retrograde Method to reset the learning curve.
17 - 47
Anderlohr Method
To assess the impact on cost of a production break, it is
first necessary to quantify how much learning was achieved
prior to the break, and then quantify how much of that
learning was lost due to the break.
George Anderlohr, a Defense Contract Administration
Services (DCAS) employee in the 1960s, divided the
learning lost due to a production break into five categories:
Personnel learning;
Supervisory learning;
Continuity of productivity;
Methods;
Special tooling.
17 - 48
Anderlohr Method
Each production situation must be examined and a weight
assigned to each category. An example weighting scheme
for a helicopter production line might be:

Category Weight
Personnel Learning 30%
Supervisory Learning 20%
Continuity of Production 20%
Tooling 15%
Methods 15%
Total 100%
17 - 49
Anderlohr Method
To find the percentage of learning lost (Learning Lost
Factor or LLF) we must find the learning lost in each
category, and then calculate a weighted average based upon
the previous weights.

Example: A contractor who assembles helicopters
experiences a six-month break in production due to the
delayed issuance of a follow-on production contract. The
resident Defense Plant Representative Office (DPRO)
conducted a survey of the contractor and provided the
following information.
During the break in production, the contractor
transferred many of his resources to commercial and
other defense programs. As a result the following can be
expected when production resumes on the helicopter
program:
17 - 50
Anderlohr Method Example
75% of the production personnel are expected to return to this
program, the remaining 25% will be new hires or transfers from
other programs.
90% of the supervisors are expected to return to this program, the
remainder will be recent promotes and transfers.
During the production break, two of the four assembly lines were
torn down and converted to other uses, these assembly lines will
have to be reassembled for the follow-on contract.
An inventory of tools revealed that 5% of the tooling will have to
be replaced due to loss, wear and breakage.
Also during the break, the contractor upgraded some capital
equipment on the assembly lines requiring modifications to 7% of
the shop instructions
Finally, it is estimated that the assembly line workers will lose
35% of their skill and dexterity, and the supervisors will lose 10%
of the skills needed for this program during the production break.
17 - 51
Anderlohr Method Example
Personnel 75% returned X 65% skill retained 48.75% learning retained
51.25% learning lost
Supervisory 90% returned X 90% skill retained 81% learning retained
19% learning lost
Continuity of Production 2 of 4 assembly lines torn down 50% learning lost
Tooling 5% lost, worn or broken 5% learning lost
Methods 7% of shop instructions need modification 7% learning lost
Calculation of Learning Lost Factor (LLF)
Category Weight
Percent
Lost
Weighted
Loss
Personnel Learning 30% 51.25% 15.4%
Supervisory Learning 20% 19% 3.8%
Continuity of Production 20% 50% 10.0%
Tooling 15% 5% 0.8%
Methods 15% 7% 1.1%
Total Learning Lost Factor (LLF) 31.0%
17 - 52
Retrograde Method
Once the Learning Lost Factor (LLF) has been estimated, we
use the LLF to estimate the impact of the cost on future
production using the Retrograde Method.
Hrs
Qty
Hrs
Lost
Units of Retrograde
17 - 53
Retrograde Method
The theory is that because you lose hours of learning, the
LLF should be applied to the hours of learning that you
achieved prior to the break.
The result of the Anderlohr Method gives you the number of
hours of learning lost.
These hours can then be added to the cost of the first unit
after the break on the original curve to yield an estimate of
the cost (in hours) of that unit due to the break in
production.
Finally, we can then back up the curve (retrograde) to the
point where production costs were equal to our new
estimate.
17 - 54
Retrograde Example
Continuing with our previous example
Assume 10 helicopters were produced prior to the six
month production break.
The first helicopter required 10,000 man-hours to complete
and the learning slope is estimated at 88%. Using the LLF
from the previous example, estimate the cost of the next
ten units which are to be produced in the next fiscal year.
Hrs
20 1 10
10,000
Qty
17 - 55
Retrograde Example
Step 1 - Find the amount of learning achieved to date.
hrs A L
hrs AX Y
Y A L
Y Y A L
b
460 , 3 540 , 6 000 , 10 . .
6540 ) 10 ( 000 , 10
000 , 10 . .
. .
) 2 ln(
) 88 . 0 ln(
10
10
10 1
= =
= = =
=
=
17 - 56
Retrograde Example
Step 2 - Estimate the number of hours of learning lost.

In this case we achieved 3,460 hours of learning, but we
lost 31% of that, or 1,073 hours, due to the break in
production.
hrs
LLF A L
073 , 1 %) 31 ( ) 460 , 3 ( Lost Learning
) ( .) . ( Lost Learning
= - =
- =
17 - 57
Retrograde Example
Step 3 - Estimate the cost of the first unit after the break.

The cost, in hours, of unit 11 is estimated by adding the
cost of unit 11 on the original curve to the hours of
learning lost found in the previous step.
hrs Y
hrs AX Y
Y Y
b
499 , 7 073 , 1 426 , 6
426 , 6 ) 11 ( 000 , 10
Lost Learning
*
11
) 2 ln(
) 88 ln(.
11
11
*
11
= + =
= = =
+ =
17 - 58
Retrograde Example
Step 4 - Find the unit on the original curve which is
approximately the same as the estimated cost, in hours, of
the unit after the break.

This can be done using actual data, but since the actual
data contains some random error, it is best to use the unit
cost equation to solve for X. In this case, X = 5.
| | 5 76 . 4
000 , 10
499 , 7
) 88 ln(.
) 2 ln(
1
~ =
(
= =
=
=
b
b
b
A
Y
X
A
Y
X
AX Y
17 - 59
Retrograde Example
Step 5 - Find the number of units of retrograde.

The number of units of retrograde is how many units you
need to back up the curve to reach the unit found in step 4.
In this example, since the estimated cost of unit 11 is
approximately the same as unit 5 on the original curve you
need to back up 6 units to estimate the cost of unit 11 and
all subsequent units.
6 5 11 Retrograde = =
17 - 60
Retrograde Example
Step 6 - Estimate lot costs after the break.
This can be done by applying the retrograde number to our
standard lot cost equation.
To estimate the cost, in hours, of units 11 through 20, we
subtract the units of retrograde from the units in question
and instead solve for the cost of units 5 through 14.

Therefore, our estimate of cost for the next 10 helicopters
is 66,753 man-hours.

hrs x x TC
x x A TC
x
b
x
b
F
x
b
L
x
b
L F
753 , 66 000 , 10
14 6 20 5 6 11
4
1
14
1
14 , 5
1
1 1
,
=
(
=
(
=
= =

= =
= =
17 - 61
Step-Down Functions
A Step-Down Function is a method of estimating the
theoretical first unit production cost based upon prototype
(development) cost data.
It has been found, in general, that the unit cost of a
prototype is more expensive than the first unit cost of a
corresponding production model.
The ratio of production first unit cost to prototype average
unit cost is known as a Step-Down factor.
An estimate for the Step-Down factor for a given weapon
system can be found by examining historical similar
weapon systems and developing a cost estimating
relationship, with prototype average unit cost as the
independent variable.
Once an appropriate CER is developed, it can be used with
actual or estimated prototype costs to estimate the first
unit production cost.
17 - 62
Step-Down Example
We desire to estimate the first unit production cost for a
new missile radar system (APGX-99). The slope of the
system is expected to be a 95% unit curve. The estimated
average prototype cost is expected to be $3.5M for 8
prototype radars.
The following historical data on similar radar systems has
been collected:
Radar
System
Production
Cost (Unit 150)
No. of
Prototypes
Prototype
AUC
APG-63 0.985M 13 7.47M
APG-66 0.414M 12 2.78M
Patriot 6.500M 4 65.20M
Phoenix 1.752M 11 13.25M
17 - 63
Step-Down Example
Because the data gives production costs for unit 150, we
can develop our CER based on unit 150 and then back up
the curve to the first unit.
Using Simple Linear Regression, we find the relationship
between development average cost (DAC) and the unit 150
production cost (PR
150
) to be:
150 , 625 $
5 . 3 0957 . 0 2902 . 0
0957 . 0 2902 . 0
150
150
150
=
- + =
- + =
PR
PR
DAC PR
17 - 64
Step-Down Example
We can now estimate our first unit cost using our unit cost
equation and the (assumed) 95% slope as follows:

This result gives an estimate for the first unit production
cost of $905,766. We have stepped down from a
development cost estimate to a production cost estimate.
766 , 905 $
) 150 ( 150 , 625 $
0740 . 0
) 2 ln(
) 95 ln(.
0740 . 0
150
=
=
=
= =
A
A
AX Y
b
b
17 - 65
Production Rate
A variation of the Unit Learning Curve Model
Adds production rate as a second variable
unit quantity costs should decrease when the rate of
production increases as well as when the quantity
produced increases
two independent effects
Model: Y
x
= Ax
b
Q
c
where Y
x
= the cost of unit x (dependent variable)
A = the theoretical cost of 1st unit
x = the unit number
b
)
Q = rate of production (quantity per period or lot)
c = rate coefficient (rate slope = 2
c
)
17 - 66
log Cost
log Rate
log Quantity
17 - 67
Rate Model Advantages
It directly models cost reductions which are achieved
through economies of scale
quantity discounts received when ordering bulk
quantities
reduced ordering and processing costs
reduced shipping, receiving, and inspection costs
17 - 68
Rate Model Weaknesses
Appropriate production rate (i.e., annual, quarterly,
monthly) is not always clear
If Q is always increasing, there tends to be a high degree of
collinearity between the quantity and rate variables
Always estimates decreasing unit costs for increasing
production rates
when a manufacturers capacity is exceeded, unit costs
generally increase due to costs of overtime,
hiring/training new workers, purchase of new capital,
etc.
17 - 69
When to Consider a Rate Model
Production involves relatively simple components for which
lot size is a much greater cost driver than cumulative
quantity
When production is taking place well down the learning
curve where it flattens out
When there is a major change in production rate
17 - 70
Model Selection Example
Using the historical airframe data below for a Navy aircraft
program, estimate the learning curve equations using
Unit theory
Rate Theory
FY Quantity
Lot Cost
(CY94$K)
Lot
Midpoint
(LMP)
Lot AUC
(FY94$K)
Cum.
Quantity
Cum. Avg.
Cost
(CY94$K)
89 15 36,750 5 2450 15 2,450
90 10 19,000 20.25 1900 25 2,230
91 60 90,000 51.26 1500 85 1,715
92 30 39,000 99.97 1300 115 1,607
93 50 60,000 139.42 1200 165 1,483
Unit Theory \ \
Cum Avg Theory \ \
Rate Theory \ \ \
Airframe
17 - 71
Unit Theory results...
I. Model Form and Equation
Model Form: Log-Linear Model
Number of Observations: 5
Equation in Unit Space: Cost = 3533.245 * Unit No ^ -0.217
III. Predictive Measures (in Unit Space)
Average Actual Cost 1670.000
Standard Error (SE) 42.817
Coefficient of Variation (CV) 2.60%
Adjusted R-Squared 99.30%
17 - 72
Cumulative Average Theory results...
Equation in Unit Space: CAC = 4359.43 * N ^ -0.21
Average Actual CAC 1896.912
17 - 73
Production Rate Theory results...
Equation in Unit Space: Cost = 3704.095 * Unit No ^ -0.206 * Qty ^ -0.026
Average Actual Cost 1670.000
17 - 74
Which model should we use?

From a purely statistical point of view, we prefer the
Cumulative Average Theory model, since it gives the best
statistics.
The real answer may depend on other issues.
Model
Standard Error 42.8 13.2 \ 31.2
CV 2.6% 0.7% \ 1.9%
Adj R
2
99.3% 99.9% \ 99.7%
Unit Cum. Avg Rate

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