A factory produces 40,000 hamburgers each week. The equipment used cost $5,000 a

Question

A factory produces 40,000 hamburgers each week. The equipment used cost $5,000 and will remain productive for 3 years. The labor cost per year is $8,000.

a. What is the productivity measure of "units of output per dollar of input" averaged during the 3 year period (show calculations)?

b. There is an option of new equipment that cost $10,000, with an operting life of 5 years. It would reduce cost to $4,000 per year. Based on productivity measurement, should the company get the new equipment (show calcualtions)?

Explanation / Answer

a. What is the productivity measure of “units of output per dollar of input” 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 investment

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