A hamburger factory produces 40,000 hamburgers each week. The equipment used cos

Question

A hamburger factory produces 40,000 hamburgers each week. The equipment used costs $5,000 and will remain productive for 4 years. The labor cost per year is $9,500.

a. What is the productivity measure of "units of output per dollar of input" averaged over the 3-year period?

b. We have the option of $10,000 equipment, with an operating life of 5 years. It would reduce labor costs to $6,000 per year. Should we consider purchasing this equipment (using productivity arguments alone)?

In the form of a spreadsheet.

Explanation / Answer

A hamburger factory produces 40,000 hamburgers each week. The equipment used costs $5,000 and will remain productive for three years. The labor cost per year is $8,000.

a. What is the productivity measure of %u201Cunits of output per dollar of input%u201D averaged over the three-year period?

Productivity = total units produced divided by the total labor cost plus total equipment cost

= 40,000(52)(3)/[8000(3) + 5000] = 215.2 hamburgers/dollar

b. We have the option of buying $10,000 of equipment, with an operating life of five years. It would reduce labor costs to $4,000 per year. Should we consider purchasing this equipment (using productivity arguments alone)?

For the expensive machine, productivity = 40,000(52)(5)/[4000(5) + 10,000] = 346.7 units of output/dollar input. Because the productivity of the expensive machine is higher, it would be a good investmen

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