I\'m having a difficult time in this course, need help with 11th edition operati

ID: 407480 • Letter: I

Question

I'm having a difficult time in this course, need help with 11th edition operation management Stevenson, William: chapter 2 problem......

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?

Explanation / Answer

The problem tabulated would be as shown below. The table gives the comparison between various factors for both old and new processes. To calculate the increase in productivity, first we calculate productivity of each of the processes.

Factor

Old Process

New Process

Units produced (Output)

No. of workers

Labour Cost per hour

Material Cost per unit (Input)

Overhead

1.6 * (Labour cost)

Unit selling price

Total Factor Productivity = (Output *Unit selling price)/ (Total labour cost per unit + Total material cost + Total Overheads)

Using the tabulated data in the above formula,

TFP of Old process = (60 * 31)/(5*12 + 16*60 + 1.6 * (5*12)) = 1860/1116 = 1.67

TFP of New process = (75 * 31)/(6*12 + 10*75 + 1.6 * (6*12)) = 2325/937.2 = 2.48

The increase in productivity = Difference in TFPs/TFP of Old process = (2.48-1.67)/1.67 = 0.488

Hence, the increase in productivity is 48.8%