Donna’s Donut Deli makes 2,000 donuts per week, on average. The Deli is open all

Question

Donna’s Donut Deli makes 2,000 donuts per week, on average. The Deli is open all year long. Donna’s current equipment has a book value of $20,000 and is expected to last for 5 years. Donna’s current labor costs are $17,500 per year.

a) What is the current productivity in terms of units of output per dollar input?

b) Donna has the option of purchasing new equipment at a cost of $25,000. It will be able to produce 3,000 donuts per week for 10 years. However, it will require that Donna hire one more worker, for $15,000, to operate the equipment. Given that Donna expects that she will be able to sell all the donuts she produces, should she consider purchasing the equipment, from a productivity standpoint?

Explanation / Answer

Productivity is defined as the ratio between the outputs and inputs.

Given that Donna's Donut Deli makes 2,000 donuts per week, on average and is open all year long.

Therefore output per year =104,000 units    ( 2,000*52 as there as 52 weeks in a year)

Donna's current labor costs are $17,500 per year

Donna’s current equipment has a book value of $20,000 and is expected to last for 5 years. Therefore, it is assumed that the yearly equipment cost is $4,000 and thus yearly total cost is $21,500 (17500+4000)

Therefore, the current productivity in terms of units of output per dollar input =104,000/21,5000 = 4.8 units per $

b) New equipment at a cost of $25,000 can produce 3,000 donuts per week for 10 years.There is additional labor cost of $15,000.

Revised output = 3,000*52 =156,000 units per year and Inputs = 2500+17500+15000=$35,000

Productivity in this case = 156000/35000= 4.4 units per $

Proposal is not acceptable on account of lower productivity.

Let us also check for the life time period of the equipment.

a) Output = 2000*52*5=520,000 Input = 20000+(17500*5)=107,500 Productivity=520,000/107,500=4.8

b) Output =3000*52*10= 1,560,000 Input =25,000+(17500+15000)*10=350,000

Productivity = 1560000/350000=4.4 units per $

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.