Question

The H & S Motor Company produces small motors at a production cost of $30 per unit. Defective motors can be reworked at a cost of $12 each. The company produces 100 motors per day and averages 88 percent good quality motors. Based on past experience, 50% of the defective motors can be reworked prior to shipping to customers. These are also considered good motors. A good motor can be sold for $100 while a defective motor can be scrapped and sold for $16. Income consists of both the revenue from the sold motors and the scrapped motors.

1. Using the number of good motors shipped as the measure of output and the cost of production as the input, what is the company's productivity if no defective motors are reworked?

2. Suppose that the company now uses the total income as the output measure and the cost of production as the input. What is the company's productivity if no defective motors are reworked?

3. Now suppose the company reworks the defective motors that can be reworked. Using the number of good motors shipped as the measure of output and the cost of production as the input, what is the company's productivity now?

4. What is the percent change in productivity comparing the productivity in #3 to the productivity in #1?

Answer 1

1.

Output:

Number of good motors shipped when no rework is done= Good motor% * Daily output = 88%*100 = 88

Input:

Cost of production = Cost per motor*Number of Motors produced = 100*30 = 3000

Productivity = Output/Input

Productivity = 88/3000 = 0.02933 motors/dollar in cost

2.

Good motors = 88

Selling price = $100

Bad motor = 12

Scrap Value = $16

Output:

Net Income = Revenue + Income from scrapped motors

Net Income = Good motors shipped*selling price + Bad motor*Scrap value

Net income = 88*100 + 12*16 = 8800 + 192 = 8992

Input:

Cost of production = 100*30 = 3000

Productivity = Output/Input

Productivity =8992/3000= 2.9973

3.

Good motors without rework = 88

Good motors with rework = (100-88)*50% [50% of bad motors created in first time production]

Good motors with rework = 12*50% = 6

Total good motors shipped = Good motors without rework + Good motors with rework = 88+6 = 94

Rework cost = $12 per motor

Output:

Total good motors shipped = 88+6 = 94

Input:

Total Cost of production = Cost of first time production + Cost of rework = 100*30 + 6*12 = 3000 + 72 = 3072

Productivity = Output/Input

Productivity =94/3072= 0.030598 motors /dollar in cost

4.

% change in productivity = *100

% change in productivity =  (0.030598 - 0.02933)/0.02933 *100

% change in productivity =  0.043232*100

% change in productivity =  4.3232%