Liberty insurance Company processes application forms. The average output In a w

Question

Liberty insurance Company processes application forms. The average output In a week is 600 claims. Currently the staff includes six full-time employees who work 40 hours per week and earn $18 per hour including fringe benefits. Management has invested in computer technology that has a weekly cost of $1, 200. Materials and energy are not used in significant amounts. What is the productivity of the application process? Suppose Liberty decides to invest in additional computer equipment that will drive the weekly cost of information technology to $1, 800. One of the application evaluators is retiring and will not be replaced. The remaining five processors should be able to do 650 applications per week with the new technology. What is the impact on productivity (please give both the new productivity ratio and the percentage change in productivity from part a)?

Explanation / Answer

Here we have average output of 600 application per week

And cost we have,

Total cost = weekly staff cost + weekly cost on computer technology

Weekly staff cost = 40 hours * 6 staff * $18 per hour rate = $ 4,320

Weekly cost on computer technology = $ 1200

Total cost = $4320 + $ 1200 = $5,520

Now productivity = $ 5,520 / 600 application = $ 9.2

Or we can say that it takes $ 9.2 to process one application

(b) Here we have average output of 650 application per week

And cost we have,

Total cost = weekly staff cost + weekly cost on computer technology

Weekly staff cost = 40 hours * 5 staff * $18 per hour rate = $ 3,600 ( assumed that one staff is reduced as one application evaluator is retiring and not replaced)

Weekly cost on computer technology = $ 1800

Total cost = $3,600 + $ 1800 = $5,400

Now productivity = $ 5,400 / 650 application = $ 8.31

Or we can say that it takes $ 8.31 to process one application

Percentage change in productivity ={ ($8.31 – $ 9.2 )/ $ 8.31 } * 100 = - 10.71%

Means that the cost has reduced by 10.71 % by the new process

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