Question

1. David Upton is president of Upton Manufacturing, a producer of Go-Karts tires. Upton makes 1200 tires per day with the following resources: Labor: 500 hours per day @15.00 per hour Raw Material: 20,000 lbs. per day at @ $2 per Ib Energy: $5,000 per day Capital: $10,000 per day a) What is the labor productivity for these tires? b) What is the multifactor productivity for these tires? c) What is the percent change in the multifactor productivity if the energy bill can be reduced by $1500 without cutting production or changing any other inputs?

Answer 1

a) Labor productivity = Output per day/Number of labor hours input per day = 1200/500 = 2.4 tires per man hour

b) Multifactor productivity = Output per day/(Labor cost + Raw material cost + Energy cost + Capital cost)

Labor cost = Labor hour per day*Labor rate = 500*15 = 7500

Raw material cost = Raw material per day*Raw material rate = 20000*2 = 40000

Energy cost = 5000

Capital cost = 10000

Multifactor productivity = 1200/(7500+40000+5000+10000) = 0.0192 tires per dollar input

c) If energy is reduced by 1500, new energy cost = 5000-1500 = 3500

New multifactor productivity assuming other values same = 1200/(7500+40000+3500+10000) = 0.019672 tires per dollar input

% change = (New multifactor productivity – Old Multifactor productivity)/Old Multifactor productivity*!00 = (0.019672-0.0192)/0.0192*100 = 2.46%

It is increased by 2.46%