POM

1. FastCo has generated productivity data for the first two quarters of the year (Table 1). Using
dollar measures of input and output, compare the total profit and productivity achieved for the
first two quarters. How does Q2 productivity compare with Q1 productivity? Use partial factor
productivity to identify what might be done to improve productivity and profitability during Q3.

Table 1: FastCo Quarterly Productivity Data

Q1 Q2
Unit selling price $20 $21
Total units sold 10,000 8,500
Labor hours 9,000 7,750
Labor cost/hr $10 $10
Material usage (lb) 5,000 4,500
Material cost/lb $15.00 $15.50
Other costs $20,000 $18,000

Solution:

Q1 Q2

Output $20*10,000=$200,000 $178,000

Input $10*9000+$15*5000+$20,000=$185,000 $165,250

Profit $200,000-$185,000=$15,000 $13,250

Productivity 200,000/185,000=1.081 1.080 (-0.1%)

Note: Are these partial-, multi-, or total factor productivities?

Profit decreased $1750 but productivity remained about the same (-0.1% year over year).

Looking at partial factor productivity for labor and materials:

Q1 Q2

Labor productivity 200,000/90,000=2.22 2.30 (+3.6%)

Material productivity 200,000/75,000=2.67 2.56 (-4.1%)

Labor productivity appears to have increased (+3.6%); material productivity appears to have
decreased (-4.1%).
2. XYZ Manufacturing uses two measures of productivity: a) total sales/total inputs, b) total
sales/total labor inputs. Given data for the last three years (Table 2), calculate the productivity
ratios. How would you interpret the results.

Table 2: XYZ Productivity Data (in millions of dollars)

Y1 Y2 Y3
Sales 110 129 124
Materials 62 73 71
Labor 28 33 28
Overhead 8 12 10

Solution:

Y1 Y2 Y3

Total sales/total inputs 1.12 1.09 (-2.7%) 1.13 (+3.7%)

Total sales/total labor input 3.93 3.91 (-0.5%) 4.42

(+13.0%)

Total factor productivity and partial factor productivity with respect to labor, after decreasing in Y2, appears to have
increased in Y3.

Note: Which of the above is total factor productivity? Why?

3. A hamburger factory produces 50,000 burgers each week. The equipment costs $5,000 and will remain
productive for three years. The annual labor cost is $8,000.

a) What is the productivity as measured in units of output per dollar of input over a 3 year period?

b) Management has the option of $10,000 equipment, with an operating life of five years. It would reduce labor
costs to $4,000 per year. Should management purchase this equipment (using productivity arguments alone)?

Solution:

a) In this case, define

productivity = (total burgers produced)/($labor+$equipment)=(50,000*52*3)/(8000*3+5000)

= 269 burgers/$input

b) for new machine project:

productivity=(50,000*52*5)/(4000*5+10,000)
=433 burgers/$input

This is a good project from a productivity perspective. Although the proposed equipment is expensive, 5 year life
and lower labor costs make new machine attractive