A company produces 300 units of a product a day, which costs $12 per unit. It...
A company produces 300 units of a product a day, which costs $12 per unit. It employs 3 workers who work 8 hours a day at an hourly rate of $12 dollars per hour. The cost for materials is $1,200 and overhead is $260. The company plans to outsource some of its work to the outside suppliers. The administration believes it will allow lay off one of the workers (use only two workers), pay the other two workers an hourly rate of $15 per hour and produce 350 units per day. But due to the changes the cost of materials will become $1,400 and overhead will become $310.
a. Calculate labor productivity in units/per hour, for both systems of production and compare the results.
b. Calculate labor productivity in units/per dollar, for both systems of production and compare the results.
c. Calculate multifactor productivity in dollar/per dollar for each system of operations (labor + materials + overhead) and compare the results.
d. Calculate the percentage of growth/decline in the multifactor productivity with the new system. Would you recommend the company to outsource this part of the operation to the supplier? Why?
Homework Answers
Daily expenses in case I -
Labour cost = 3x8x12 = 288
Material cost = 1200
Overhead = 260
Total =1748
Daily expenses in case II
Labour cost = 2x8x15 =240
Material Cost =1400
Labour cost =310
Total =1950
(a) Productivity in case I = 300 / 3x8 = 12.5
Productivity in case II = 350 /2x8 = 21.87
(b) Productivity in case I = 300 /3x8x12 =1.04
Productivity in case II = 350 /2x8x15 = 1.45
(c) Multifactor Productivity in case I = 300 units /1748 dollars = 0.171 unit /dollar
Multifactor Productivity in case II = 350 units / 1950 dollars = 0.1794 units /dollar
MFP in dollars / dollar = dollar earned / dollars spent in material + labour + overhead
Case I = 300x12 /1748 =2.052
Case II = 350x12 /1950 = 2.152
(d) Percentage growth = MFP in case II / MFP n case I
= 2.152 /2.052 = 1.0487
The growth is 4.87%.
The outsourcing decision is not advisable as the business is saving on its operations.
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