Question

Profit-Linked Productivity Measurement

In 20x2, Choctaw Company implements a new process affecting labor and materials.

Choctaw Company provides the following information so that total productivity can be valued:

	20x1	20x2
Number of units produced	510,000	420,000
Labor hours used	170,000	210,000
Materials used (lbs.)	2,550,000	1,400,000
Unit selling price	$21	$23
Wages per labor hour	$13	$15
Cost per pound of material	$3.70	$3.80

Required:

1. Calculate the cost of inputs in 20x2, assuming no productivity change from 20x1 to 20x2. 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 20x2. 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 20x1 to 20x2 is attributable to price recovery? Calculate the total profit change.
$

Calculate the price-recovery component.
$

Answer 1

(1).
Cost of labor (140,000 * $15)	$21,00,000
Cost of materials (21,00,000 * $3.80)	$79,80,000
Total PQ cost	$100,80,000

Working note;

1. First of all let’s calculate labor and material productivity ratios;

Labor productivity ratio (510,000 / 170,000) = 3

Materials productivity ratio (510,000 / 25,55,000) = 0.20

2. Now let’s calculate PQ for 20x2;

PQ labor (420,000 / 3) = 140,000 hrs.

PQ materials (420,000 / 0.2) = 21,00,000 lbs.

(2).
Cost of labor (210,000 * $15)	$31,50,000
Cost of materials (14,00,000 * $3.80)	$53,20,000
Total current cost	$84,70,000

(3).
Labor productivity change (140,000 – 210,000) * $15	- $10,50,000
Materials productivity change (21,00,000 – 14,00,000)* $3.80	$26,60,000
Total	$16,10,000

(4).
	20x1	20x2	Change
Revenue	$1,07,10,000	$96,60,000	($10,50,000)
	(510,000*$21)	(420,000*$23)
Costs;
Labor cost	($22,10,000)	($31,50,000)	($9,40,000)
	(170,000*$13)
Materials cost	($94,35,000)	($53,20,000)	$41,15,000
	(25,50,000*$3.70)
Net profit	($9,35,000)	$11,90,000	$21,25,000

Thus total profit change is $21,25,000

Price recovery = Total profit change – Profit-linked productivity change

Price recovery = $21,25,000 – $16,10,000

Price recovery = $5,15,000