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# Management Accounting Pillar Managerial Level Paper

P2 – Management Accounting Decision Management
23 May 2007 – Wednesday Morning Session
Instructions to candidates

TURN OVER
 The Chartered Institute of Management Accountants 2007

P2 – Decision Management

SECTION A – 20 MARKS [the indicative time for answering this section is 36 minutes] ANSWER ALL EIGHT SUB-QUESTIONS

The answers to the eight sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number and then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. For sub-questions 1.6, 1.7 and 1.8 you should show your workings as marks are available for the method you use to answer these sub-questions.

Question One
1.1 An investment project that requires an initial investment of \$500,000 has a residual value of \$130,000 at the end of five years. The project’s cash flows have been discounted at the company’s cost of capital of 12% and the resulting net present value is \$140,500. The profitability index of the project is closest to: 0·02 0·54 0·28 0·26 (2 marks) 1.2 A project has a net present value of \$320,000. The sales revenues for the project have a total pre-discounted value of \$900,000 and a total present value of \$630,000 after tax. The sensitivity of the investment to changes in the value of sales is closest to: A B C D \$310,000 \$580,000 51% 36% (2 marks)

A B C D

P2

2

May 2007

Calculate the total time expected to produce the first four units.4 A company has recently completed the production of the first unit of a new product.000 hours each period. The company expects that there will be a 75% learning rate for this product.000) 80.000 (2 marks) 1. The breakeven fee income each period is closest to: A B C D \$1. including staff costs.980 when it is discounted using a cost of capital of 10%.000 90. but the average contribution to sales ratio is 35%.000 Calculate the Accounting Rate of Return of the project using the average investment value basis.143.500.5 and 1.6 Calculate the Internal Rate of Return of the project. The fixed costs of the office.400. The time taken for this was 12 minutes. (2 marks) 1. Fee income and variable costs are different depending on the services provided.1. (3 marks) TURN OVER May 2007 3 P2 .000 100.000 60.000 \$7.3 A company provides a number of different services to its customers from a single office.5 \$ (200.000 \$11. are absorbed into the company’s service costs using an absorption rate of \$25 per consulting hour based on a budgeted activity level of 100.000 \$875.000 40.6 below An investment project with no residual value has a net present value of \$87. (2 marks) The following data are given for sub-questions 1. The annual cash flows are as follows: Year 0 1 2 3 4 5 1.

There are no specific fixed costs but general fixed costs are absorbed using an absorption rate of \$8 per unit.1. The unit selling prices. Answers to Section A written on the question paper will not be submitted for marking. The maximum demand for each of the products during the next accounting period is expected to be as follows: X 240 units Y 600 units Z 400 units No inventories of finished products are held.200 units. (3 marks) 1. Note: When Price = a-bx then Marginal Revenue = a-2bx (4 marks) (Total for Section A = 20 marks) Reminder All answers to Section A must be written in your answer book.7 A company manufactures three products. The material available is expected to be limited to 600 kgs for the next accounting period.8 A company is launching a new product. The estimated variable costs of the product are \$30 per unit. End of Section A Section B starts on page 6 P2 4 May 2007 . Each of these products use the same type of material but in different quantities. cost and profit details are as follows: Product Selling price Direct materials Direct labour Variable overhead Fixed overhead Profit X \$/unit 23 6 8 2 4 3 Y \$/unit 26 8 6 3 5 4 Z \$/unit 28 6 8 3 6 5 The direct material used on all three products costs \$10 per kg. Market research shows that if the selling price of the product is \$100 then demand will be 1. Calculate the optimum product mix for the next accounting period. Calculate the selling price at which profit is maximised. but for every \$10 increase in selling price there will be a corresponding decrease in demand of 200 units and for every \$10 decrease in selling price there will be a corresponding increase in demand of 200 units.

Section B starts on the next page TURN OVER May 2007 5 P2 .

000 units. The company has estimated the costs of the initial batch of the product as follows: Direct materials Direct labour (\$10 per hour) Other direct costs \$000 200 250 100 Production was planned to occur in batches of 10. with production occurring in batches of 10. Thereafter the direct labour cost per batch was expected to be constant. At this time any unsold units of the company’s product would be of no value. No changes to the direct labour rate per hour were expected. Direct labour was paid using the expected hourly rate of \$10 and the company is now reviewing the profitability of the product.000 for the first batch.000 and as a result has discovered that the market price for the product should be \$50 per unit. The following schedule shows the actual direct labour cost recorded: Cumulative number of batches 1 2 4 8 Actual cumulative direct labour cost \$000 280 476 809 1. Discuss the implications of your answers to (i) and (ii) for the managers of the company.SECTION B – 30 MARKS [the indicative time for answering this section is 54 minutes] ANSWER ALL THREE QUESTIONS Question Two A company is planning to launch a new product. It has already carried out market research at a cost of \$50.000 units and it was expected that an 80% learning curve would apply to the direct labour until the fourth batch was complete. Calculate the actual learning rate exhibited at each level of output. The company introduced the product at the price stated above. (10 marks) (Total for Question Two = 10 marks) Section B continues on the opposite page P2 6 May 2007 .000 units of the product could be sold at this price before one of the company’s competitors enters the market with a superior product. The company estimates that 80.376 Required: (i) (ii) (iii) Calculate the revised expected cumulative direct labour costs for the four levels of output given the actual cost of \$280.

Question Three A company operates a fleet of three canal boats that provide cruises for tourists around the canals of a city.000 \$35.000 per year regardless of the age of the boat.000 K \$800.000 Operating costs. and Briefly explain how the data may be used by the company when choosing between alternative investments. The company has already evaluated the marketing campaigns taking into consideration the range of possible outcomes that could result from the investment.000 \$105.000 L \$400.000 80. Operating costs and end of year trade-in values vary depending on the age of the boat and are as follows for each year of the boat’s life: Year 1 2 3 Operating Costs \$ 300. (4 marks) (Total for Question Three = 10 marks) May 2007 7 P2 .000 400.000 \$105. Ignore taxation. and similar costs are paid at the end of each year. servicing. which include maintenance. The company has provided the following data: Annual sales revenue from operating each boat Purchase cost of each boat \$ 800. The company uses an 8% cost of capital for its investment decisions. All three marketing campaigns have a life of five years. (6 marks) The same company is also considering investing in one of three marketing campaigns to increase its profitability.000 600.000 These costs do not include depreciation or any other fixed costs of providing the tourist service. A summary of the calculations is shown below: Marketing Campaign Expected Net Present Value Standard Deviation of Net Present Value J \$400. These other fixed costs are a constant \$100.000 Required: (b) (i) (ii) Explain the meaning of the data shown above. every two years or every three years. Required: (a) Produce calculations to determine the optimum replacement cycle of the boats and state clearly your recommendations.000 400. require the same initial investment and have no residual value. The company seeks your advice as to whether it is better to replace its boats every year.000 150.000 Trade-in values \$ 240.

500 Normal loss Outputs: Product R Product S Product T Kg 500 800 2.000 1.000 1. no fixed costs variable cost of \$1·00 per kg. The common process account of Z for March 2007 is shown below: Kg Inputs: Material A Material B Material C Direct labour Variable overhead Fixed cost Totals 1. no fixed costs variable cost of \$0·90 per kg. SZ and TZ respectively.000 2.000 2. R.500 \$ 0 3.000 3.000 1.500 8.000 17. S or T after this common process or they can be individually further processed and sold as RZ.750 5.250 17.200 4. fixed cost of \$600 per month The question requirement is on the opposite page P2 8 May 2007 .500 2.500 \$ 3.Question Four Z is one of a number of companies that produce three products for an external market. S and T may be bought or sold in this market.000 6.500 Z can sell products R. The three products. The market prices for the products at the intermediate stage and after further processing are: Market prices per kg: R S T RZ SZ TZ \$ 3·00 5·00 3·50 6·00 5·75 6·75 The specific costs of the three individual further processes are: Process R to RZ Process S to SZ Process T to TZ variable cost of \$1·40 per kg.500 4.

Clearly state your recommendations together with any relevant assumptions that you have made. and assuming that there is not an external market for products R.S and T.S and T.Required: (a) Produce calculations to determine whether any of the intermediate products should be further processed before being sold. State clearly your recommendations. (3 marks) Produce calculations to assess the viability of the common process: assuming that there is an external market for products R. (7 marks) (Total for Question Four =10 marks) (b) (i) (ii) (Total for Section B = 30 marks) End of Section B Section C starts on the next page TURN OVER May 2007 9 P2 .

the remainder is payable in the following year. which does not qualify for tax depreciation. The company is liable to pay corporation tax at a rate of 30% of its profits.000 70.000 60. A draft financial statement showing the values that are specific to this third investment for the three years is as follows: Year 1 \$ Sales Production costs: Materials Labour Other* Profit Closing receivables Closing payables 230.000 54.000 Year 3 \$ 270.000 66.000 8.000 9.000 Year 2 \$ 350.000. The expected residual value at the end of the project’s life is \$50.000 102.000 25.000 *Other production costs shown above include depreciation calculated using the straight line method. The third investment is a new product that would be produced on a just-in-time basis and which is expected to have a life of three years. Required: (a) Calculate the net present value of the above investment proposal.000 80.000 6. One half of this is payable in the same year as the profit is earned. The company uses an after tax cost of capital of 6% and has already completed the evaluation of two investments.000 20.SECTION C – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER TWO QUESTIONS OUT OF THREE Question Five X operates in an economy that has almost zero inflation.000 30. (10 marks) (b) Explain how the above investment project would be appraised if there were to be a change in the rate of inflation so that it became too significant to be ignored. alternative investments.000 80.000 90. Management ignores inflation when evaluating investment projects because it is so low as to be considered insignificant.000 54.000.000 36. This investment requires an immediate cash outflow of \$200. (5 marks) P2 10 May 2007 .000 80. X is evaluating a number of similar.000 78.

with supporting calculations.000 Net Present Value \$ 75. None of the investments may be repeated.000 The company only has \$400. (4 marks) (Total for Question Five = 25 marks) Recommend. (3 marks) Section C continues on the next page TURN OVER May 2007 11 P2 .000 27. Required: (c) (d) (i) (ii) Briefly explain gain sharing arrangements. which of the three investment proposals should be accepted. All of the investment proposals are nondivisible.000 of funds available. (3 marks) Explain the reasons why X might not want to overcome its investment funding limitations by using a gain sharing arrangement.The evaluations of the other two investments are shown below: Investment W Y Initial investment \$ 300.000 100.

It is seeking to increase its business by winning work from new customers. but some of the printing will require overtime working due to the availability of a particular machine that is used on other work. H does not foresee any other use for this ink. This is expected to take 20 hours of machine time.Question Six H. Material B This is a special ink that H will need to purchase at a cost of \$8 per litre. H’s inventory policy is to review slow moving items regularly. The cost of any inventory item that has not been used for more than 6 months is accounted for as an expense of the period in which that review occurs. Direct labour Sufficient people are already employed by H to print the catalogue. This is a paper that is in regular use by H and the company has 3. A rate of \$10 per hour is paid for these overtime hours. uses traditional absorption costing to report its monthly profits. She is not currently fully employed and receives a salary of \$500 per week. These originally cost \$1·40 per sheet but the current market price is \$1·50 per sheet.000 and its details are summarised below: Production period It is expected that the total time required to print and despatch the catalogue will be one week.400 sheets in inventory. 200 litres will be required for this catalogue but the supplier has a minimum order size of 250 litres. The resale price of the sheets held in inventory is \$1·20 per sheet. The absorption rate that it uses is \$20 per direct labour hour. Machinery Two different types of machine will be required: Machine A will print the catalogues. There is currently 30 hours of unused time on machine A per week that is being sold to other printers for \$12 per hour. P2 12 May 2007 . The catalogue will require 25 machine hours and these have a running cost of \$4 per hour. Fixed overhead costs H uses a traditional absorption costing system to attribute fixed overhead costs to its work. Profit mark-up H applies a 30% mark-up to its costs to determine its selling prices. The running cost of machine A is \$5 per hour. Supervision An existing supervisor will take responsibility for the catalogue in addition to her existing duties. Employees are paid using an hourly rate with a guaranteed minimum wage for their normal working week. the order will require 150 hours of work and 50 of these hours will be in excess of the employees’ normal working week. A technical report on the resource requirements for the catalogues has been completed at a cost of \$1. The employees are normally paid \$8 per hour. Machine B will be used to cut and bind the catalogues. Material A 10. It now has the opportunity to prepare a quotation for a large organisation that currently requires a new catalogue of its services.000 sheets of special printing paper will be required. but will hold the surplus in inventory. a printing company. Despatch There will be a delivery cost of \$400 to transport the catalogues to the customer. This machine is being used to full capacity in the normal working week and this is why there is a need to work overtime.

Required: (a) In order to assist the management of H in preparing its quotation. prepare a schedule showing the relevant costs for the production of the catalogues. Your answer should also discuss the conflict between reporting profitability within a traditional absorption costing system and the use of relevant cost based pricing. State clearly your reason for including or excluding each value that has been provided in the above scenario. (10 marks) (Total for Question Six = 25 marks) (b) Section C continues on the next page TURN OVER May 2007 13 P2 . (15 marks) Explain how the use of relevant costs as the basis of setting a selling price may be appropriate for short-term pricing decisions but may be inappropriate for long-term pricing decisions.

100. and therefore the fee income of D.000 Probability 0·3 0·5 0·2 Required: (a) Calculate the expected annual fee income of D. Required: (b) Using Expected Values. Operating the call centre that deals with logging and scheduling rescues. calculate the breakeven number of members.000. Providing patrol vehicles and mechanics for breakdown assistance. There is equal probability of these costs being as expected. At present all members pay a basic fee of \$100 per year but D is considering the introduction of different fees for members depending on the data they provide when joining the service. or 20% lower. (4 marks) Now that you have presented your calculations and explanations to the Management Team of D they have questioned the validity of the assumption that costs are caused by and therefore vary in relation to the number of members. In addition D expects to incur annual fixed costs of \$1. The number of members. how it may be used by management. Recording details of the time taken to respond to members’ rescues. (6 marks) (d) Explain the meaning of table that you have produced in (c) above and. They referred to the activities that are performed by the company: • • • • • P2 Processing applications for membership. (2 marks) The operating costs to be incurred by D have been analysed between call-out costs and administration costs.000 30. 14 May 2007 . by including appropriate probability values. is uncertain but the following estimates have been made: Number of members 20. (3 marks) (c) Prepare a two-way data table that shows the nine possible profit values.Question Seven D provides a motorist rescue service to its members. These operating costs have been assumed to vary in relation to the number of members and consequently the average costs per member for next year are expected to be: Call-out cost per member for the year Administration cost per member for the year \$50 \$10 Each of these operating costs may vary by plus or minus 20%. Recording details of the costs incurred in carrying out each rescue.000 40. 20% higher.

(10 marks) (Total for Question Seven = 25 marks) (Total for Section C = 50 marks) End of question paper.The Management Team collectively agreed that your assumption that operating costs are driven by the number of members was too simplistic and that in future the Administration department should request the following information from members: • • • • • • Member’s date of birth. Number of years the member has been a qualified driver. Average annual mileage. Member’s address. Maths Tables and Formulae are on pages 17 to 19 TURN OVER May 2007 15 P2 . Make and model of vehicle. Required: (e) Explain how and why the collection of this data from members might improve the information that would be available to the Management Team. Age of vehicle.

596 0.816 0.178 10% 0.962 0.893 0.582 0.312 Interest rates (r) 15% 16% 0.980 0.060 0.270 0.658 0.104 13% 0.233 0.862 0.368 0.820 0.340 0.513 0.362 0.855 0.630 0.700 0.933 0.125 0.327 0.212 0.290 0.138 0.116 0.404 0.314 0.558 0.111 0.873 0.285 0.714 0.257 0.889 0.885 0.292 0.277 0.198 0.425 0.857 0.686 0.452 0.915 0.505 0.437 0.209 0.456 7% 0.570 0.482 0.535 0.107 0.400 0.065 0.837 0.863 0.828 0.676 0.905 0.673 3% 0.137 0.926 0.923 0.925 0.773 0.296 0.942 0.870 0.424 0.585 0.456 0.961 0.694 0.160 0.942 0.388 0.642 0.187 0.577 0.160 0.587 0.145 0.722 0.416 0.026 May 2007 17 P2 .887 0.763 0.218 0.124 12% 0.191 0.093 0.952 0.073 17% 0.326 0.194 0.052 0.783 0.840 0.718 0.308 0.229 0.215 0.792 0.601 0.499 0.388 0.896 0.917 0.836 0.317 0.104 0.PRESENT VALUE TABLE Present value of \$1.178 0.031 20% 0.093 0.463 0.037 19% 0.605 0.376 0.436 0.760 0.971 0.744 0.354 0.812 0.081 0.961 0.747 0.069 0.482 0.476 0.351 0.227 0.239 0.195 0.703 0.475 0.140 0.390 0.552 0.797 0.481 0.335 0.095 0.507 0.693 0.163 0.180 0.164 0.555 0.772 0.708 0.888 0.623 0.071 0.728 0. Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.237 0.153 0.350 0.508 0.038 0.901 0.043 18% 0.636 0.130 0.971 0.769 0.735 0.429 0.500 0.756 0.557 0.204 0.661 0.031 0.215 9% 0.746 0705 0.419 0.820 2% 0.315 0.731 0.790 0.758 0.677 0.208 0.116 0.037 0.609 0.980 0.258 0.906 0.081 0.352 0.840 0.286 0.209 0.924 0.181 0.370 0.497 0.123 0.519 0.592 0.625 0.469 0.051 4% 0.287 0.432 0.572 0.376 0.751 0.148 0.123 0.135 0.467 0.784 0.614 0.579 0.417 0.683 0.822 0.951 0.339 0.540 0.544 0.391 0.794 0.130 0.853 0.410 0.078 0.176 0.044 0.070 0.051 0.890 0.935 0.163 0.766 0.231 0.261 0.444 0.194 0.675 0.990 0.183 0.844 0.847 0.681 0.502 0.842 0.061 0.659 0.317 0.182 0.706 0.356 0.083 0.275 0.279 0.527 0.494 0.567 0.593 0.837 0.225 0.087 14% 0.060 0.627 0.162 0.665 0.319 0.296 0.095 0.231 0.624 0.266 0.861 0.386 0.497 0.534 0.295 0.080 0.162 0.943 0.914 0.731 0.460 0.099 0.098 0.079 0.205 0.108 0.243 0.666 0.322 0.396 0.247 0.062 0.870 0.141 0.712 0.475 0.168 0.879 0.422 0.456 0.564 0.250 0.415 0.711 0.069 0.701 0.093 0.530 0.442 0.458 0.170 0.743 0.333 0.543 0.149 11% 0.888 0.141 0.813 0.284 0.249 0.333 0.826 0.299 0.125 0.650 0.252 0.943 0.124 0.516 0.480 0.111 0.554 −n where r = interest rate.232 0.909 0.788 0.394 0.804 0.258 8% 0.361 0.853 0.613 0.084 0.371 0.871 0.789 0. that is (1+ r ) payment or receipt.402 0.641 0.054 0.045 0.731 0.592 0.681 0.208 0.188 0.263 0.534 0.377 0.331 0.352 0.833 0.864 0.043 0.877 0.232 0. n = number of periods until Interest rates (r) 5% 6% 0.855 0.645 0.593 0.263 0.713 0.547 0.305 0.434 0.513 0.112 0.583 0.350 0.059 0.397 0.743 0.823 0.907 0.051 0.152 0.623 0.270 0.621 0.108 0.650 0.088 0.146 0.

793 4.146 5.702 7.103 7.630 4.901 1.754 14.998 4.061 8.128 6.361 2.206 5.002 6.487 3.828 11.170 3.712 10.467 6.201 8.367 7.853 9.840 6.943 1.968 5.499 7.283 2.635 11.487 7.070 5.756 8.799 5.639 4.517 3.549 7.970 2.626 1.724 5.926 1.108 9.373 6.494 4.808 2.736 2.710 7.255 12.876 4.368 11.120 7.435 8.544 8.685 4.855 1.818 5.902 4.687 5.863 9.963 12% 0.833 5.231 4.938 12.991 3.029 5.628 6.690 3.696 4.870 P2 18 May 2007 .862 1.160 4.246 2.783 2.495 6.462 4.723 2.085 12.102 3.216 5.986 10.174 2.802 7.775 4.475 5.679 16.106 10.829 3.487 4.111 8.145 6.470 7% 0.324 14.865 14.990 5.339 4.423 4.750 6.952 0.836 4.954 6.230 7.910 5.995 6.971 1.624 3.387 4.358 8.313 8.962 1.296 11.652 12.421 5.379 7.786 6.950 9.971 6.265 6.274 3.417 6.366 7.024 7.020 7.917 1.047 6.025 14% 0.659 13.805 7.329 4.192 4.760 9.515 7.247 6.355 4.745 9.058 3.253 9.166 13.887 8.594 8% 0.839 7.884 3.811 6.472 7.889 6.992 15.534 5.954 10.974 3.210 2.946 5.046 2% 0.611 4.197 5.787 10.847 1.583 5.002 6.198 6.410 3.328 5.019 5.935 1.302 6.639 3.718 15.127 3.433 3.158 11.824 8.814 7.870 0.336 10.759 2.514 11% 0.384 8.899 10.162 8.922 4.601 6.604 9.623 Interest rates (r) 15% 16% 0.855 2.348 12.528 2.207 6.561 13.353 19% 0.938 7.690 12.108 7.547 2.453 5.234 5.463 7.982 7.380 10.240 3.974 7.749 5.938 6.250 7.656 7.242 6.772 5.562 16.652 8.859 1.668 5.877 5.324 5.877 1.106 2.531 3.713 2.537 5.759 6.118 11.439 4.492 6.988 5.122 6.675 4.849 13.623 5.288 4.722 8.163 4.812 4.729 6.767 5.802 4.535 5.076 5.191 7.713 5.913 2.292 14.162 5.550 6.743 3.929 17% 0.316 5.575 5.462 6.111 4.210 6.008 5.360 7.563 11.134 13.660 5.372 9.730 4.607 4.647 2.037 3.129 10% 0.578 14.161 7.447 9.584 5.468 5.918 6. Receivable or Payable at the end of each year for n years 1− (1+ r ) − n r Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.022 8.059 10.868 5.451 4.033 5.486 4.833 2.890 4.889 4.166 12.100 4.402 3.342 5.650 5.942 2.465 4.798 3.791 4.604 6.582 6.589 3.886 2.244 8.092 5.327 4.132 5.605 4.312 3.589 2.385 9.818 9% 0.199 3.893 1.993 4.452 5.140 2.983 9.426 5.733 7.575 11.122 9.980 1.904 8.207 4.909 1.690 2.226 18.590 Interest rates (r) 5% 6% 0.498 3.885 1.585 2.914 3.533 4.786 8.747 6.274 11.039 4.990 1.229 5.118 5.394 9.577 3.668 2.606 7.418 6.808 4.605 3.943 8.530 9.033 5.134 13.031 4.325 8.471 10.605 2.322 2.335 5.142 6.728 7.847 5.405 5.840 1.712 5.954 4.212 5.352 3.303 4.628 18% 0.566 9.078 4.775 3.917 5.838 11.424 6.469 13% 0.853 5.941 3.842 6.580 5.259 3.365 8.795 6.106 12.101 20% 0.351 3% 0.717 4.851 9.837 4.306 8.536 7.398 17.706 3.878 4% 0.763 10.566 2.326 3.833 1.222 5.611 4.784 4.344 4.273 5.Cumulative present value of \$1 per annum.477 10.564 4.786 8.659 4.139 7.194 6.389 5.444 3.004 13.715 4.938 4.295 9.843 4.546 3.812 4.559 8.673 3.486 5.

a = the time required to produce the first unit of output.FORMULAE Time series Additive model: Series = Trend + Seasonal + Random Multiplicative model: Series = Trend*Seasonal*Random Regression analysis The linear regression equation of Y on X is given by: Y = a + bX where: b= and or solve Covariance ( XY ) Variance ( X ) = n ∑ XY − ( ∑ X )( ∑ Y ) n ∑ X − (∑ X ) 2 2 or Y – Y = b(X – X ). X = the cumulative number of units. a= Y –bX ∑ Y = na + b ∑ X ∑ XY = a ∑ X + b ∑ X2 Exponential Geometric Y = abx Y = aXb Learning curve where: Yx = the cumulative average time per unit to produce X units. Yx = aXb May 2007 19 P2 . b = the index of learning. The exponent b is defined as the log of the learning curve improvement rate divided by log 2.