ACTIVITY PRODUCTIVITY
In an effort to become more competitive, Hardy Company has embarked on a program to reduce and eliminate its non value added activities and to improve the efficiency of its value added activities. The activity of paying bills has been classified as value added and in need of improvement. The major inputs for the activity are clerks, personal computers (PCs), and supplies. Activity output is defined as “paid bills” and is measured by the number of checks issued. The materials handling activity, on the other hand, is classified as a non value added activity and is targeted for reduction and possible elimination (at least as a significant activity). The major inputs for materials movement (the output) are labor, forklifts, and supplies. Over a 2 year period, Hardy has made some changes in the way each activity is performed. For example, Hardy has redesigned its plant layout to reduce the demand for materials movement. Process innovation also dramatically changed the way that bills were paid. Data are provided for the two activities for a base year and the most recent year completed. The year just completed was the second year of Hardy’s improvement program.
|
Activity |
Base Year |
Most Recent Year |
|
Paying bills: |
|
|
|
Output |
300,000 |
320,000 |
|
Inputs: |
|
|
|
Clerks (no.) |
15 |
5 |
|
PCs (no.) |
15 |
5 |
|
Supplies (lbs.) |
150,000 |
40,000 |
|
Moving materials: |
|
|
|
Output |
20,000 |
5,000 |
|
Inputs: |
|
|
|
Labor (hrs.) |
10,000 |
3,000 |
|
Forklifts (no.) |
5 |
2 |
|
Supplies (lbs.) |
4,000 |
2,000 |
Required:
1. Prepare productivity profiles for both activities. Comment on the usefulness of these profiles for assessing improvement in activity performance.
2. Given the following most recent year’s input prices for the paying bills activity, calculate the activity’s profit linked measure:
|
Clerks |
$25,000 per person |
|
PCs |
$5,000 per system |
|
Supplies |
$1 per pound |