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Question 3.I: The overhead costs for a company are presently $Xper month. ...

The overhead costs for a  company are presently $X per month. The management team of the company,  in cooperation with the employees,  is ready to implement  a comprehensive  improvement program to  reduce these  costs. If you (a) consider an  observation  of actual overhead costs for one month analogous to an output unit, (b) estimate the overhead costs for  the first month  of program implementation to be 1.15 X due to extra front-end  effort, and (c) consider a 90% improvement  curve applicable  to the situation, what is your estimate  of the percentage reduction in present overhead costs per month after  30 months of program implementation?

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K = 1.15 X;  s = 0.90 (90% learning curve); n = (log 0.90)/(log 2) = −0.152
Z_{30} = 1.15 X(30) ^{-0.152} = 0.686 X
After 30 months, a (1 – 0.686) = 31.4% reduction in overhead costs is expected (with respect to the present cost of $X).

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