Question

1) A company has improved its production process. Under the old process, 19 workers could produce 4206 units per hours and the materials cost $53 per unit of output. Workers are paid $15 per hour and the finished product is sold for $126 per unit. After the improvement, materials costs have been reduced by $12 per unit of output and it now takes 4 fewer workers to make the same amount of output. What is the percentage change in multifactor productivity? (do not use a % sign, e.g. enter 50% as .5)

Answer 1

Labor rate = $15 per hour

Selling price = $126 Per unit

Case 1: Old Process

Number of workers = 19

Output = 4206 Units

Material cost = $53 per unit of output

Total material cost = 53 x 4206

= $222,918

Labor cost = Labor rate x Number of workers

= 15 x 19 = $285

Total revenue = Selling price per unit x Output

= 126 x 4206

= $529,956

Multifactor productivity (MFP1) = Revenue / (Labor cost + Material cost)

= 529956 / (285 + 222918)

= 2.375

Case 2: Improved Process

Number of workers = 19 – 4 = 15

Output = 4206 Units

Material cost = $53 – 12 = $41 per unit of output

Total material cost = 41 x 4206

= $172,446

Labor cost = Labor rate x Number of workers

= 15 x 15 = $225

Total revenue = Selling price per unit x Output

= 126 x 4206

= $529,956

Multifactor productivity (MFP2) = Revenue / (Labor cost + Material cost)

= 529956 / (225 + 172446)

= 3.070

Change in Multifactor productivity = (MFP2 / MFP1) – 1

= 0.2926 = 29.26%