A hamburger factory produces 60,000 hamburgers each weeks. The equipment used co

Question

A hamburger factory produces 60,000 hamburgers each weeks. The equipment used cost $10,000 and will remain productive for four years. The labor cost per year is $13,500.
a. What is the productively measure of units of output per dollar of input, averaged over the four-year period ?

b. The company has the option of purchasing equipment for $13,000, with an operating life of five years. It would reduce labor cost to $11,000 per year. Should it consider purchasing this equipment ( using productivity arguments alone ) ?

Explanation / Answer

a. Total Production in 4 years = Number of weeks in 4 years* produce per week = (4*52)*60000 =12,480,000 Units

Total cost incurred = Fixed cost of equipment+Labour cost for 4 years = 10000+(13500*4) = $54,000

Therefore, Productivity = Total Production/Total cost = 12480000/54000 = 231.11 ~ 231 Units/Dollar input

b. New Total Production = 5*52*60000 = 15,600,000 Units

New Cost total = New Equipment cost+ Total labour cost for 5 years = 13000+(11000*5) = $68000

Productivity = Total Production/Total cost = 15600000/68000 = 229.41 ~ 229 Units/Dollar input

As the new productivity(229 Units/$) is less than the previous productivity (231 Units/$), so the company should not consider purchasing the new equipement worth $13000.

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