Question

Question no.3 (10)

DEKA produces controller boards on a 10-person assembly line. On a recent day, 160 controller boards were produced during an 8-hour shift. Each labor is paid $80 per day.

Details of the other resources are as follows:

Raw Material	300 kg per day @$1 per kg
Energy	$200 per day
Capital Costs	$500 per day

a) Calculate the labor productivity of the line.

b) Calculate the multifactor productivity.

  

c) DEKA decided to improve its multifactor productivity by 10%. In order to do so it needs to reduce one of its costs.

i) If they decide to decrease the cost of raw material only, what percent of raw material needs to be reduced to achieve the target? Interpret your results.

ii) If they decide to decrease the cost of labor only, what percent of labor cost needs to be reduced to achieve its target? Interpret your results.

Answer 1

a)

Labor productivity = Output / Labor hours

= 160 controller boards / (10 persons * 8 hour)

= 2 controller boards per labor hour

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b)

Total cost = Labor cost + Raw material cost + Energy cost + Capital cost

= 10*80 + 300*1 + 200 + 500

= $ 1800

Multi-factor productivity = Output / Total cost

= 160 / 1800

= 0.0889 controller boards per dollar

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c)

i)

After 10% improvement, target multi-factor productivity = 0.0889*1.1 = 0.0978

Target total cost = 160/0.0978

= $ 1636

Reduction in raw material cost required = Reduction in total cost

= 1800 - 1636

= $ 164

Percentage reduction in raw material = 164/300

= 54.7 %

Interpretation: raw material should be reduced from current 300 kg per day to 136 kg per day (=300*(1-54.7%)) in order to improve multi-factor productivity by 10%

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ii)

Current labor cost = 10*80 = $ 800

Percentage reduction in labor cost = 164/800 = 20.5 %

Interpretation: labor cost reduction would require reduction in manpower, Approximately 20% reduction in labor cost means 8 persons, instead of 10 persons need to be required.