Cost Estimates for World Satellite Telephone Exchange Project
NSDC has a contract to produce eight satellites to support a worldwide telephone system (for Alaska Telecom, Inc.) that allows individuals to use a single, portable telephone in any location on earth to call in and out. NSDC will develop and produce the eight units. NSDC has estimated that the R&D costs will be NOK (Norwegian Krone) 12,000,000. Material costs are expected to be NOK 6,000,000. They have estimated that the design and production of the first satellite will require 100,000 labor hours, and an 80 percent improvement curve is expected. Skilled labor cost is NOK 300 per hour. Desired profit for all projects is 25 percent of total costs.
How many labor hours should the eighth satellite require?
How many labor hours for the whole project of eight satellites?
What price would you ask for the project? Why?
Midway through the project, your design and production people realize that a 75 percent improvement curve is more appropriate. What impact does this have on the project?
Near the end of the project, Deutsch Telefon AG requests a cost estimate for four satellites identical to those you have already produced. What price will you quote them? Justify your price.
Cost Estimates for World Satellite Telephone Exchange Project
The World Satellite Telephone Exchange Project undertaken by NSDC aims to revolutionize global communication through the deployment of eight satellites. This essay will provide a detailed cost analysis, including labor hours required for production, pricing strategies, and the implications of an adjustment in the improvement curve.
Labor Hours Required for the Eighth Satellite
To calculate the labor hours required for the eighth satellite, we first need to understand the concept of the improvement curve. The 80% improvement curve indicates that for every doubling of production, the time taken to produce each unit decreases to 80% of the previous unit's time.
The formula to calculate labor hours for subsequent units using an improvement curve is:
[
\text{Labor hours for nth unit} = \text{Labor hours for first unit} \times (n^{\log_2(\text{Improvement Rate})})
]
Given:
- Labor hours for the first satellite = 100,000 hours
- Improvement rate = 80% (0.8)
Calculating for the eighth satellite (n=8):
[
\text{Labor hours for 8th satellite} = 100,000 \times (8^{\log_2(0.8)})
]
Using ( \log_2(0.8) \approx -0.32193 ):
[
\text{Labor hours for 8th satellite} = 100,000 \times (8^{-0.32193}) \approx 100,000 \times 0.593 = 59,300 \text{ hours}
]
Total Labor Hours for Eight Satellites
To find the total labor hours required for all eight satellites, we can sum the labor hours for each individual satellite:
1st Satellite: 100,000 hours
2nd Satellite: (100,000 \times 0.8^1 = 80,000) hours
3rd Satellite: (100,000 \times 0.8^2 = 64,000) hours
4th Satellite: (100,000 \times 0.8^3 = 51,200) hours
5th Satellite: (100,000 \times 0.8^4 = 40,960) hours
6th Satellite: (100,000 \times 0.8^5 = 32,768) hours
7th Satellite: (100,000 \times 0.8^6 = 26,214.4) hours
8th Satellite: (59,300) hours
Totaling these values gives:
[
100,000 + 80,000 + 64,000 + 51,200 + 40,960 + 32,768 + 26,214.4 + 59,300 \approx 454,442.4 \text{ hours}
]
Pricing Strategy
To determine the price to request for the project, we must first calculate the total costs involved.
Total Cost Calculation
1. R&D Costs: NOK 12,000,000
2. Material Costs: NOK 6,000,000
3. Labor Costs: - Total Labor Hours: (454,442.4)
- Skilled Labor Cost: NOK 300/hour
- Total Labor Cost: (454,442.4 \times 300 = NOK 136,332,720)
Total Costs
Total costs can be calculated as:
[
\text{Total Costs} = \text{R&D} + \text{Material} + \text{Labor}
]
Substituting in our values:
[
\text{Total Costs} = 12,000,000 + 6,000,000 + 136,332,720 = NOK 154,332,720
]
Desired Profit
To find the price we would ask for the project:
[
\text{Desired Profit} = 25% \times \text{Total Costs} = 0.25 \times NOK 154,332,720 = NOK 38,583,180
]
Thus:
[
\text{Price} = \text{Total Costs} + \text{Desired Profit} = NOK 154,332,720 + NOK 38,583,180 = NOK 192,915,900
]
Impact of a Change in Improvement Curve
If halfway through the project it is determined that a 75% improvement curve is more appropriate instead of an 80% improvement curve, it implies that each subsequent satellite will take less time to produce than previously calculated.
New Labor Hours Calculation
Using a 75% improvement curve results in:
1st Satellite: (100,000) hours
2nd Satellite: (100,000 \times 0.75^1 = 75,000) hours
3rd Satellite: (100,000 \times 0.75^2 = 56,250) hours
4th Satellite: (100,000 \times 0.75^3 = 42,187.5) hours
5th Satellite: (100,000 \times 0.75^4 = 31,640.625) hours
6th Satellite: (100,000 \times 0.75^5 = 23,730.46875) hours
7th Satellite: (100,000 \times 0.75^6 = 17,797.85156) hours
8th Satellite: (100,000 \times 0.75^7 = 13,348.38867) hours
Recalculating totals will reduce total labor hours needed and thus lower overall project costs and pricing.
Cost Estimate for Deutsch Telefon AG
Finally, near the end of the project when Deutsch Telefon AG requests a cost estimate for four identical satellites already produced using either the original or adjusted curves (depending on which is chosen), we can create a pricing strategy based on actual costs incurred.
For identical satellites produced under the initial calculations (using an 80% improvement curve), we would quote them based on the previous total price divided by eight satellites and multiplied by four:
Price per satellite (from original calculation):
[
= \frac{NOK 192,915,900}{8} \approx NOK 24,114,487.50
]
Thus for four satellites:
[
= NOK 24,114,487.50 \times 4 \approx NOK 96,457,950
]
Justification
The pricing reflects not only expenses incurred but also desired profit margins while ensuring competitive market positioning based on technological advancements and service coverage capabilities.
In conclusion,
the World Satellite Telephone Exchange Project involves intricate cost estimations and pricing strategies that respond dynamically to changes in production efficiencies and market demands. Adjustments in labor hour expectations significantly impact overall project costs and pricing quotes for potential buyers like Deutsch Telefon AG.