Liberty Insurance Company processes application forms. The average output in a w

Question

Liberty Insurance Company processes application forms. The average output in a week is 600 claims. Currently the staff includes six full-time employees who work 40 hours per week and earn $18 per hour including fringe benefits. Management has invested in computer technology that has a weekly cost of $1,200. Materials and energy are not used in significant amounts.

a. What is the productivity of the application process?

b. Suppose Liberty decides to invest in additional computer equipment that will drive the weekly cost of information technology to $1,800. One of the application evaluators is retiring and will not be replaced. The remaining five processors should be able to do 650 applications per week with the new technology. What is the impact on productivity (please give both the new productivity ratio and the percentage change in productivity from part a)?

Explanation / Answer

a. Productivity = output/input. Output = 600 claims

Input consists of labor costs and cost of computer technology. labor costs = 6 employees*40 hours*$18 = $4,320 per week. Total input = 4320+1200 (cost of computer technology) = 5520

Productivity = 600 claims/$5,520 = 0.1087 claims per dollar.

b. New output = 650 claims.

Input cost of computer = $1800. cost of labor = 5 employees*40 hours*$18 = $3,600

Total input costs = 1800+3600 = $5,400

New productivity = 650/5400 = 0.1204 claims per dollar.

Thus the new productivity has increased.

% increase = change in productivity/old productivity

= (0.1204-0.1087)/0.1087

= 10.76%

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