A company has introduced a process improvement that reduces processing time for

Question

A company has introduced a process improvement that reduces processing time for each unit, so that output is increased by 30% with less material, but one additional worker required. Under the old process, 6 workers could produce 90 units per hour. Labor costs are $12/hour, and material input was previously $19/unit. For the new process, material is now $13 unit. Overhead is charged at 1.8 times direct labor cost. Finished units sell for $33 each. Answer each of the following questions: Before the Process Improvement, the Multifactor Productivity = After the Process Improvement, the Multifactor Productivity = The increase in productivity associated with the process improvement =

Explanation / Answer

Refer to the table below:

Hence before the process improvement, multifactor productivity = 2970/1911.6 = 1.554

And after the process improvement, multifactor productivity = 3861/1756.2 = 2.198

Hence increase in productivity after process improvement = (2.198-1.554)/1.554*100 = 41%

Previous Process Details Newer Process Details Workers = 6 (Labor Cost = 6*12 = $72) Workers = 7 (Labor Cost = 7*12 = $84) Units produced = 90 Units produced (30% increase) =1.3*90= 117 Material cost = 90*19 = $1710 Material cost = 117*13 = $1521 Overhead cost = 1.8*72 = $129.6 Overhead cost = 1.8*84 = $151.2 Output value = 90*33 = $2970 Output value = 117*33 = $3861 Total input cost = 72+1710+129.6= $1911.6 Total input cost = 84+1521+151.2= $1756.2

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