(a) LEVEL UNIT PRICING AND VARIABLE UNIT PRICING

(1) "Level Unit Pricing" (also known as "level line pricing") means all items under the multi-year contract have identical unit prices. Level unit prices result from amortizing certain costs over the entire contract quantity. These costs include nonrecurring costs. In major systemsacquisitions, these costs can also be those recurring or variable costs that are not alike from item to item or program year to program year. For example, the learning curve for production of complex items is a significant driver of production costs. If the first unit costs more, due to being earlier on the learning curve, those higher costs would have to be spread over all units to achieve level unit pricing.

(2) "Variable Unit Pricing" means that unit prices may vary from unit to unit or from program year to program year. In major systems acquisitions, the actual cost of production items tends to vary (usually downward, as the system matures and more units are produced). Consequently, variable unit pricing is the norm for major systems MYCs, and provides the only way to ensure that unit prices reflect item value.

(3) Figure 13.A illustrates, in constant dollars, how a 50-system program would be affected over a 5 year MYC using the variable unit pricing and level unit pricing method. For program year one using level unit pricing you would require $200 less in funding, but your cancellation ceiling would be $200 greater. In program year four, the reverse is true and the level unit funding is greater.

(4) Deciding which pricing approach to use must be done as early in the MYC process as possible. It is a prerequisite for preparing the MYP Exhibits that make up the MJP. The pricing method will affect the funding profile for the program and the projected cancellation ceiling in each year of the multi-year contract.