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 25% with less material, but one additional worker required. Under the old process, five workers could produce 60 units per hour. Labor costs are $12/hour, and material input was previously $16/unit. For the new process, material is now $10/unit. Overhead is charged at 1.6 times direct labor cost. Finished units sell for $31 each. What increase in productivity is associated with the process improvement? Please provide steps with how you solved the answer

Explanation / Answer

Old process: Labor cost = 12 per worker*5 workers = 60/hr

Production = 60 units* 31 per unit/ 60 + (60)(16) + (60)(1.6) = 1.667

New process : Labor cost = 12/worker*6 workers = 72/hr

Production = 75 units*31 per unit/ 72 + (75)(10) + (72)(1.6) = 2.48

Increase in productivity would be = (2.48 - 1.667)/1.667*100 = 48.8 %

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