EOAECTMA

EOAECTMA - How to Calculate an Experience Curve In its...

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How to Calculate an Experience Curve In its simplest form, the experience curve (EC) represents the relationship between cost and volume when accumulated volume has doubled. The slope of the experience curve when accumulated volume has doubled equals 2 α . This formula implies that, each time the accumulated volume in units of the product doubles, costs drop by 1-2 α . EC = 1 - 2 α , where α = (log C 2 – Log C 1 ) / (log AV 2 – log AV 1 ) Where C 1 = Total costs less raw material costs per unit of output in real dollars in period 1 C 2 = Total costs less raw material cost per unit of output in real dollars in period 2 AV 1 = Accumulated volume in period 1 AV 2 = Accumulated volume in period 2 Converting nominal or current dollars to real dollars: Real dollars = (Nominal Dollars / Price Deflator) x 100 Calculating accumulated volumes: Add annual volume and take a cumulative total each year Year Annual Data Accumulated Data 1996 12 12 1997 14 26 1998 10 36 1999 15 51 2000 20 71 Example: Computer Corporation of America produced .1 million units in 1990, its first year of
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