A contractor builds large ships for the Department of Defense. A recent contract called for 12 amphibious landing platforms. It was originally estimated that the first of these would cost $1 billion and that 80 percent learning would be appropriate

Question

In fact, the first ship cost $1.6 billion and the second $1.12 billion. What is the revised learning curve? What will be the total cost of the twelve ships? Is it higher or lower than the original estimate? If the defense department cuts the contract from 12 ships to 9, what happens to the average cost per ship?

Answer 1

The original estimates called for $1 billion × 7.227 = $7.227 billion for 12 ships. The revised learning curve is 70 percent ($1.12 bil. / $1.6 bil.). At the revised costs and learning curve, 12 ships will cost $1.6 billion × 5.501 = $8.802 billion, which is higher than the original estimate. If the contract is reduced to 9 ships, the cost would be $1.6 billion × 4.626 = $7.402 billion. The average cost of 12 ships is $733.5 million each; the average cost of nine is $822.4 million each, which is an increase of $88.9 million per ship.