Labor Productivity Problem 30 points Long Beach Bank employs three loan officers
ID: 1103157 • Letter: L
Question
Labor Productivity Problem 30 points Long Beach Bank employs three loan officers, each working eight hours per day. Each officer processes an average of five loans per day (15 loans per day). The bank's payroll cost for the officers is $820 per day, and there is a daily overhead expense of S500. a. Compute the labor productivity (average product of labor). Interpret result. b. Compute the multifactor productivity, using loans per dollar cost as the measure. Interpret result. The bank is considering the purchase of new computer software for the loan operation. The software wil enable each loan officer to process eight loans per day, although the overhead expense will increase to $550. c. Compute the new labor productivity. Calculate change in labor efficiency. d. Compute the new multifactor productivity. Calculate change in labor efficiency. e. Should the bank proceed with the purchase of the new software? Calculate change in cost per unit of production as part of your explanation.Explanation / Answer
a. Average product of labor = Total product/ number of inputs
This implies that the productivity of labor = Total number of loans processed in a day divided by the number of officers doing the task. That is, 15/3 = 5 loans per day.
This implies that an officer, on an average, is able to process 5 loans a day.
b. Multifactor productivity = output/input, where input is a combination of both, the cost of employing officers as well as the daily overhead expenses.
Here, output = 3*5 = 15 loans (that is, 5 loans each by 3 officers)
Input (in dollars) = cost of officers + overhead expenses per day = $820 + $500 = $1,320.
Thus, multifactor productivity (loans processed per dollar) = 15/1,320 = 0.01136 loans per dollar of inputs.
The multifactor productivity of 0.01136 implies that for every dollar spent to employ an officer for processing loans and the overhead expenses faced by the bank, 0.01136 of a loan is issued.
c. Each officer processes 8 loans per day. Thus, total product = 3*8 = 24 loans a day.
Input = 3 officers
Thus, average product of labor = Total product/Number of inputs = 24/3 = 8 loans per day.
An officer on a day processes an average of 8 loans.
d. Output = 3*8 = 24 loans (that is, 8 loans each by 3 officers)
Input (in dollars) = cost of officers + overhead expenses per day (that have increased as a result of the purchase of a new computer software) = $820 + $550 = $1,370.
Thus, multifactor productivity (loans processed per dollar) = 24/1,370 = 0.01751 loans per dollar of inputs.
The multifactor productivity of 0.0175 implies that for every dollar spent to employ an officer for processing loans and the overhead expenses faced by the bank, 0.0175 of a loan is issued.
e. The decision to purchase or not to purchase the new software is based on the change in multifactor productivity and change in cost structure.
Multifactor change in productivity (in percentage) = (new productivity - old productivity)/old productivity
= ( 0.01751 - 0.01136)/0.01136
= 0.00615/0.01136
= 54.14%.
Thus, the multifactor productivity has increased as a result of the new software.
The cost of a loan with the old software = 1320/15 = $88
While the same after the new software is purchased is 1370/24 = $57
Thus, the cost of a loan also declines when the new software is purchased. Thus, it is profitable to purcahse the new software since the costs are getting reduced and the productivity has increased.
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