Problem:
PRODUCTIVITY MEASUREMENT, BASICS
Fowler Company produces handcrafted leather purses. Virtually all of the manufacturing cost consists of materials and labor. Over the past several years, profits have been declining because the cost of the two major inputs has been increasing. Wilma Fowler, the president of the company, has indicated that the price of the purses cannot be increased; thus, the only way to improve or at least stabilize profits is to increase overall productivity. At the beginning of 2007, Wilma implemented a new cutting and assembly process that promised less materials waste and a faster production time. At the end of 2007, Wilma wants to know how much profits have changed from the prior year because of the new process. In order to provide this information to Wilma, the controller of the company gathered the following data:
|
|
2006
|
2007
|
|
Unit selling price
|
$16
|
$16
|
|
Purses produced and sold
|
18,000
|
24,000
|
|
Materials used
|
36,000
|
40,000
|
|
Labor used
|
9,000
|
10,000
|
|
Unit price of materials
|
$4
|
$4.50
|
|
Unit price of labor
|
$9
|
$10
|
Required:
1. Compute the productivity profile for each year. Comment on the effectiveness of the new production process.
2. Compute the increase in profits attributable to increased productivity.
3. Calculate the price-recovery component, and comment on its meaning.