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Hendrix Ltd have just developed a new component, an 'axis' for use in large capacity flash drives. The current component with which it would compete, costs 4 and its price in real terms has been dropping at 7% per annum over the past three years. Skinsoft Unit Price 2.00 Unit Variable Cost 1.40 Unit Volume 1,000,000 Hendrix would be only the second supplier of these components to the market where demand is estimated to be as follows: current year 0.5 million units next year 1 million units year 3 1.5 million units year 4 2 million units Hendrix have been test manufacturing the 'axis' and they calculate that the 16th unit off the final production line cost 100 and the company have estimated they will be operating on an 80% experience curve. Part a. (50 marks) Assuming the 80% experience curve holds for the manufacture of the components you are asked to calculate the following: i) If the 16th unit cost 100, what did the first unit cost? ii) What will be the average cost per unit at the point at which Hendrix have produced a total 250,000 units of the component? iii) What will be the average cost per unit at the point at which Hendrix have produced a cumulative total of 2 million units? Part b. (50 marks) Based on the experience curve, recommend a pricing strategy to Noel Redding, the marketing manager of Hendrix Ltd. pointing out any other issues which you feel he should consider.

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