Question

Cindy Jo’s Hair Salon is concerned about their rising costs of supplies, energy, and labor, so they are considering investing in better equipment, which hopefully will reduce the time required to perform most hair styles as well as resulting in better perceived quality by their customers. They predict that the added investment will increase output levels as well as reduce energy costs, since some of the new equipment (hair dryers) use less electricity. You may use Excel if you choose, or a Word Processing document - but you must show your work for calculating your answers.

Using the following information, then determine:

1. Determine the current and total productivity measures by doing the following (be sure to show your work completely):

a. Current total productivity

b. Expected Total Productivity total

1. What is the % increase

2. Using expected Single Factor compute the following:

a. Labor Productivity (current and expected); then % increase

b. Energy Productivity (current and expected); then % increase

c. Material Productivity (current and expected); then % increase

3. What other items should be considered, before making this capital investment?

4. Do you think the increase in output will overcome the capital costs and why?

                       

Inputs and Outputs

Inputs and Outputs	Current (this year)	Expected (next year)
Hairstyles per week	250	300
Labor costs per week	$960	$1010
Energy costs per week	$400	$350
Material costs per week	$300	$325
Capital investment	$0	$12,000

Answer 1

Productivity = total output/ total input

Productivity = hairstyle per week/ (labor cost per week + energy cost per week + material cost per week)

1.

Current productivity:

Productivity = 250 / ( 960+400+300)

Productivity = $0.15 per hairstyle

Expected productivity:

Productivity = 300/(1010+350+325)

Productivity = $0.17 per hairstyle

% increase = ($0.17/0.15) -1

%increase = 13.3%

2.

a. labor productivity

productivity =total output/total input

current productivity = 250/960

current productivity = $0.26 per hair style

Expected productivity = 300/1010

Expected productivity = $0.29 per hair style

Increase = (0.29/0.26) -1

Increase = 11.5%

b. energy productivity

current productivity = 250/400

current productivity = $ 0.62 per hairstyle

expected productivity = 300/$350

Expected productivity = $0.85 per hairstyle

Increase =(0.85/0.62)-1

Increase = 37%

c. material productivity

current productivity = 250/300

current productivity = $0.83 per hair style

expected productivity = 300/$325

Expected productivity = $0.92 per hairstyle

Increase = (0.92/0.83)-1

Increase = 10.8%

3. Before making decision to invest in new machinery one has to take in account maintenance cost of current and expected maintenance productivity. This helps in determining overall cost of running machine.

4. No, increase in output does not overcome capital cost. This is because cost of making hairstyle currently is $0.15 per hairstyle and expected is $0.17. which means cost of production increases once investment is done. This is bad option.