Question

Profit-Linked Productivity Measurement In 2015, Choctaw Company implements a new process affecting labor and materials. Choctaw Company provides the following information so that total productivity can be valued: 2014 2015 Number of units produced 570,000 480,000 Labor hours used 114,000 120,000 Materials used (lbs.) 2,850,000 1,600,000 Unit selling price 20 22 Wages per labor hour 12 14 Cost per pound of material 3.70 3.80 Required: 1. Calculate the cost of inputs in 2015, assuming no productivity change from 2014 to 2015. If required, round your answers to the nearest dollar. Cost of labor $ Cost of materials    Total PQ cost $ 2. Calculate the actual cost of inputs for 2015. If required, round your answers to the nearest dollar. Cost of labor $ Cost of materials    Total current cost $ What is the net value of the productivity changes? If required, round your answers to the nearest dollar. $ How much profit change is attributable to each input's productivity change? If an item is negative, use a minus (-) sign to indicate. Labor productivity change $ Materials productivity change $ 3. What if a manager wants to know how much of the total profit change from 2014 to 2015 is attributable to price recovery? Calculate the total profit change. $ Calculate the price-recovery component. $

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Solution

Answer 1

1.

Base perios productivity ratios:

for labor = 570,000/114,000 = 5

for material = 570,000/2,850,000 = 0.20

Thus we have,

PQ for labor = 480,000/5 = 96,000 Labor hrs

PQ for material = 480,000/0.20 = 2,400,000 lbs

Therefore,

Cost of Labor = 96,000 * 14 = $ 1,344,000

Cost of material = 2,400,000 * 3.80 = $ 9,120,000

Total PQ cost = $ 1,344,000 + $ 9,120,000 = $ 10,464,000

2.

Cost of labor = 120,000 * 14 = $ 1,680,000

Cost of material = 1,600,000 * 3.80 = $ 6,080,000

Total current cost = $ 1,680,000 + $ 6,080,000 = $ 7,760,000

Net value of productivity changes = $ 10,464,000 - $ 7,760,000 = $ 2,704,000

the change in profit attributable to each input productivity change is,

Labor productivity change = $ 1,344,000 - $ 1,680,000 = - $ 336,000

Material productivity change = $ 9,120,000 - $ 6,080,000 = $ 3,040,000

3.

Total profit/loss in 2014 is,

Sales = 570,000 * 20 = $ 11,400,000

Cost of material = 2,850,000 * 3.70 = $ 10,545,000

Cost of labor = 114,000 * 12 = $ 1,368,000

Loss in 2014 = $ 11,400,000 - $ 10,545,000 - $ 1,368,000 = - $ 513,000

Total profit/loss in 2015 is,

Sales = 480,000 * 22 = $ 10,560,000

Total current cost = $ 7,760,000

profit in 2015 = $ 10,560,000 - $ 7,760,000 = $ 2,800,000

Total profit change from 2014 to 2015 is = $ 2,800,000 - (- $ 513,000) = $ 3,313,000

Price recovery component

= Total profit change - Profit linked produnctivity change (i.e., Net value of productivity change)

= $ 3,313,000 - $ 2,704,000

= $ 609,000.

Thank you.