Profit-Linked Productivity Measurement In 2015, Choctaw Company implements a new
ID: 329727 • Letter: P
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:
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.
2. Calculate the actual cost of inputs for 2015. If required, round your answers to the nearest dollar.
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.
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.
$
Explanation / Answer
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:
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
2014 2015 Labour Productivity (units/hr) 5.0 4.0 Material Productivity (Lbs/unit) 3.3 2.5Related Questions
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