1. A company has introduced a process improvement that reduces processing time f
ID: 364917 • Letter: 1
Question
1. A company has introduced a process improvement that reduces processing time for each unit, so that output is increased by 25% with less material, but one additional worker required. Under the old process, five workers could produce 60 units per hour. Labor costs are $12/hour, and material input was previously $16/unit. For the new process, material is now $10/unit. For both old and new processes, overhead is charged at 1.6 times direct labor cost. Finished units sell for $31 each. a. (10 pts) What is the productivity in the old process. b. (10 pts) What is the productivity in the new process. c. (7 pts) What increase in productivity is associated with the process improvement?Explanation / Answer
Calculation for old process for 1 hour production of 60 units :
Revenue earned from production of 1 hour = 60 units x $31/ unit = $1860
Labour cost = $12/worker hour x 5 workers = $60
Overhead cost ( @1.6 times labour cost ) = $60 x 1.6 = $96
Material cost = $16 / unit x 60 units = $960
Thus, Total cost = $60 + $96 + $960 = $1116
Hence productivity = Revenue / Total cost = 1860 / 1116 = 1.666
Calculation for new process for 1 hour production of 60 units :
Revised output per hour after 25% increase in output =1.25 x 60 = 75
Revenue earned from 1 hour production of 75 units = 75 x $31 = $2325
Labour cost = $12/worker hour x 6 workers = $72 ( one additional worker in now required )
Overhead cost ( @1.6 times labour cost ) = $72 x 1.6 = $115.20
Material cost = $10 / unit x 60 units = $600
Thus, Total cost = $72 + $115.20 + $600 = $787.20
Hence productivity = Revenue / Total cost = 2325/ 787.20 = 2.953
Hence, Increase in productivity associated with process improvement
= ( Productivity in new process – Productivity in Old process) / Productivity in old process x 100
= ( 2.953 – 1.666)/1.666 x 100
= 77.25 %
PRODUCTIVITY IN OLD PROCESS = 1.666
PRODUCTIVITY IN NEW PROCESS = 2.953
INCREASE IN PRODUCTIVITY ASSOCIATED WITH PROCESS IMPROVEMENT = 77.25%
PRODUCTIVITY IN OLD PROCESS = 1.666
PRODUCTIVITY IN NEW PROCESS = 2.953
INCREASE IN PRODUCTIVITY ASSOCIATED WITH PROCESS IMPROVEMENT = 77.25%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.