Costs don't always behave in a linear manner. For example, labor costs per unit typically decline as more units are produced. This is because workers learn and become increasingly efficient the more they perform a task. Thus, the time to perform a task (and hence the labor cost per task) decreases as the worker performs the task more times.
There are two types of models used in learning curve analysis:
(1) the cumulative average-time learning model
(2) the incremental unit-time learning model
The cumulative average-time learning model assumes that the cumulative average time per unit decreases by a set percentage each time the cumulative quantity of units produced doubles. Thus, if a learning curve of 80% is assumed, then the average time per unit would decrease by 20% (100% - 80%) each time the company doubles production (e.g., going from one unit to two units produced).
The incremental unit-time learning model assumes that the incremental time of making a unit decreases by a set percentage each time the cumulative quantity of units produced doubles.—
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