PRODUCTIVITY MEASUREMENT: TRADE OFFS, PROFILE AND PROFIT LINKED ANALYSES
Bradshaw Company has recently installed a computer aided manufacturing system. The decision to automate was made so that material waste could be reduced. Better quality and a reduction of labor inputs were also expected. After one year of operation, management wants to see if the expected productivity improvements have materialized. The president is particularly interested in knowing whether the trade off between capital, labor, and materials was favorable. Data concerning output, labor, materials, and capital are provided for the year before implementation and the year after.
|
|
Year Before |
Year After |
|
Output |
100,000 |
120,000 |
|
Input quantities: |
|
|
|
Materials (lbs.) |
25,000 |
20,000 |
|
Labor (hours) |
5,000 |
2,000 |
|
Capital (dollars) |
$10,000 |
$300,000 |
|
Input prices: |
|
|
|
Materials |
$5 |
$5 |
|
Labor |
$10 |
$10 |
|
Capital |
10% |
10% |
Required:
1. Prepare a productivity profile for each year. Evaluate the productivity changes.
2. Calculate the change in profits attributable to the change in productivity of the three inputs. Assuming that these are the only three inputs, evaluate the decision to automate.