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.)	1,900,000	1,200,000
Unit selling price	25	27
Wages per labor hour	16	18
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.
$

Answer 1

Labour Productivity = Number of units produced/No. of labour hours

Material Productivity = Volume of material used (in lbs)/Number of units produces. So for 2014 & 2015, below table shows the productivity numbers:

	2014	2015
Labour Productivity (units/hr)	5.0	4.0
Material Productivity (Lbs/unit)	3.3	2.5

First Part - Cost in 2015 assuming productivity levels of 2014 :

For 5,70,000 units, labour hour required was 114000

So for 4,80,000 units, labour hour reqd = 96,000

Labour rate in 2015 = $18.

Therefore, labour cost = 96000*18 = $17,28,000

Again, for 5,70,000 units, material used was 19,00,000 lbs

so, for 480000 units, material used would be = 16,00,000 lbs

So, material cost in 2015 would be = 16,00,000 * 3.8 = $60,80,000

Therefore total cost in 2015 without productivity improvement would be 17,28,000 + 60,80,000 = $78,08,000

Second Part - Actual Cost in 2015: Please refer table below :

Cost of Labour = 1,20,000*18 = $21,60,000

Cost of Material = 12,00,000*3.8 = $45,60,000

Total Actual Cost = $67,20,000

THIRD PART : Productivity change

Labour Charge with 2014 productivity = $17,28,000 (Calculated in 1st Part)

Labour Charge with 2015 productivity = $21,60,000 (Calculated in 2nd Part)

Change in labour productivity = -$4,32,000

Material Cost with 2014 productivity = $60,80,000

Material Cost with 2015 productivity = $45,60,000

Change in material productivity = $15,20,000

Total profit due to productivity change = 1520000-432000 = $10,88,000

Last Part

Total Revenue in 2014 = 5,70,000*25 = $1,42,50,000

Total Cost in 2014 = $88,54,000 ( 114000*16 + 1900000*3.7)

Profit in 2014 = $53,96,000

Total Revenue in 2015 = 4,80,000*27 = 1,29,60,000

Total Cost in 2015 = 67,20,000

Total Profit in 2015 = $62,40,000

Change in profit between 2015 and 2014 = $62,40,000 - $53,96,000 = $8,44,000

Change in profit due to productivity improvement = $10,88,000

It means that there has been under recovery from the market.

Underrecovery = 8,44,000 - 10,88,000 = $2,44,000