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             510,000                420,000

Labor hours used                          170,000                 210,000

Materials used (lbs.)                      1,700,000           1,050,000

Unit selling price                                     22                         24

Wages per labor hour                            12                          14

Cost per pound of material                    3.50                     3.60

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.

$

Answer 1

1.

S.no	Particular's	Calculation	Number of hour's/Number of material's used	Price per cost driver	Total cost
			a	b	a*b
1.	Cost of labor	(170,000/510,000)*420,000	140,000	14	$ 1,960,000
2.	Cost of materials	(1,700,000/510,000)*420,000	1,400,000	3.6	$ 5,040,000
3.	Total PQ cost	(1+2)			$ 7,000,000

2.

Actual cost of inputs in 2015:

S.no	Particular's	Number of hour's/Number of material's used	Price per cost drive	Total cost ($)
		a	b	a*b
1.	Cost of labor	210,000	14	2,940,000
2.	Cost of materials	1,500,000	3.6	5,400,000
3.	Total PQ cost (1+2)			8,340,000

Net value of productivity change:

Net value of productivity change is = 8,340,000 - 7,000,000 = $ 1,340,000

Profit change attributable to each input's productivity change:

S.no	Particular's	Cost if there is no productivity change	Cost if there is a productivity change	Difference
1.	Labor productivity changes	1,960,000	2,940,000	- $ 980,000
2.	Materials productivity changes	5,040,000	5,400,000	- $ 360,000
				- $ 1,340,000

3.

Profit change from 2014 to 2015 attributable to price recovery as follow's:

S.no	Particular's	2014	2015	Difference
1.	Revenues	11,220,000 (510,000*22)	10,080,000 (420,000*24)	1,140,000
2.	less:Cost of goods sold	7,990,000 (1700000*3.5+170000*12)	6,720,000 (1050000*3.6+210000*14)	1,270,000
3.	Profit (1-2)	3,230,000	3,360,000	130,000

So, Profit change is $ 130,000

Price recovery:

Price recovery = Total profit change - Profit linked productivity change

= 130,000 - (-1,340,000)

Price recovery = $ 1,470,000

----------------------HOPE THIS IS HELPFUL.