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Problems and cases

Topic VI: Productivity Analysis
1. Partial Operational Productivity, Total productivity. Ashley Technology Inc. manufactures a
scrambling device for cellular telephones. The device’s main component is a delicate part, CT140.
CT140 is easily damaged and requires careful handling. Once damaged, it must be discarded. The firm
hires only skilled laborers to manufacture and install CT140; however, some are still damaged. Robotic
instruments process all other parts. Ashley’s operating data for 2 years are as follows:

2019 2018
Units manufactured 1,020,000 1,320,000
Number of CT140 used 1,150,000 1,330,000
Number of direct labor hours spent 170,000 220,000
Cost of CT140 per unit $ 158 $ 137
Direct labor wage rate per hour $ 58 $ 64

Assume that fixed manufacturing costs are $52 million in both 2018 and 2019.

Required:
1. Compute the partial operational productivity for both direct materials and direct labor for each
of the 2 years. (Round your answers to 4 decimal places.)
2. On the basis of the partial operational productivity that you computed, what conclusions can you
draw about the firm’s productivity in 2019 relative to 2018?
3. Compute the total productivity ratios for 2018 and 2019. (Round your answers to 4 decimal
places.)
4. On the basis of the total productivity that you computed, what conclusions can you draw about
the firm’s productivity in 2019 relative to 2018?

2. Partial Operational and Financial Productivity. In the fourth quarter of last year, Colditz Company
embarked on a major effort to improve productivity. It redesigned products, reengineered
manufacturing processes, and offered productivity improvement courses. The effort was completed
in the last quarter of the current year. The controller’s office has gathered the following year-end data
to assess the results of this effort:

Current Prior
Year Year
Units manufactured and sold 30,000 24,000
Selling price of the product $ 51 $ 51
Direct materials used (pounds) 15,100 14,100
Cost per pound of materials $ 15 $ 12
Direct labor hours 6,350 7,100
Hourly wage rate $ 30 $ 25
Power (kwh) 2,000 1,000
Cost of power per kwh $ 3 $ 3
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Required:
1. Prepare a summary contribution income statement for each of the 2 years, and calculate the
change in operating income.
2. Compute the partial operational productivity ratios for each production factor in each year.
3. Compute the partial financial productivity ratios for each production factor in each year.
4. On the basis of the partial operational and financial productivity ratios computed in 2. and 3.,
what conclusions can you make about the firm’s productivity last year relative to the current
year?
5. Separate the changes in the partial financial productivity ratio from the prior year to the current
year into productivity changes, input price changes, and output changes.
6. Consider the changes calculated in requirement 5. Does this detailed information offer any
additional insight into the relative productivity of Colditz for the prior year and the current year?

3. Partial Operational and Financial Productivity; Medical Practice. Family Medical Care (FMC) is a
family medical practice with 6 physicians, a nursing staff of 8 to 10 nurses, and an administrative
staff that varies from 4 to 7 personnel. Rajat Patel, the chief physician at FMC, is interested in
studying the efficiency of the practice as a basis to set some benchmarks for further improvement,
for rewarding his staff, and for comparing the efficiency of the FMC practice to other family medical
practices. He is able to get comparable data for other practices from industry sources. So that the
data are consistent with the industry sources, Patel has asked Marin & Associates, his accounting
firm, to develop a set of productivity measures that would satisfy this requirement. Upon
investigation, Joseph Marin finds that the measures to be used are the partial financial and
operational productivity measures as defined in the chapter. The following information is for the last
2 years for the FMC practice:

Current Year Prior Year

Patient visits 33,500 29,100
Nursing hours used 20,800 19,900
Administrative hours used 13,925 13,925
Cost of nursing support per hour $ 44.00 $ 43.00
Cost of administration per hour $ 29.60 $ 29.00
Industry average financial productivity
Nursing 0.031 0.030
Administrative 1.170 1.190

Required:
1. Compute the partial operational productivity ratios for nursing and administrative support for
the current and prior year.
2. Compute the partial financial productivity ratios for nursing and administrative support for the
current and prior year.
3. Separate the change in the partial financial productivity ratio from the prior year to the current
year into productivity changes, input price changes, and output changes.
(For all requirements, round your answers to 4 decimal places. Negative values should be indicated by a
minus sign.)
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4. Prospective Productivity Measurement; Technical and Input Tradeoff Efficiency; Profile and Profit-
Linked Analysis. The manager of Blakely Company was reviewing two competing projects for the
molding department. The projects represented different methods of preparing the molds for one of
the company’s more popular product lines. One project changed the way molds were poured and
promised a savings in material usage. The second project redesigned the process so that labor was
used more efficiently. The fiscal year was coming to a close, and the manager wanted to make a
decision concerning the proposed process changes so that they could be used, if beneficial, during the
coming year. The process changes would affect the department’s input usage. For the year just ended,
the accounting department provided the following information about the inputs used to produce
100,000 units of output:

Quantity Unit Prices

Material 200,000 $8
Labor 80,000 10
Energy 40,000 2

Each project offers a different process design from the one currently being used. Neither project would
cost anything to implement. Expected input usage for producing 120,000 units (the expected output
for the coming year) for each project is as follows:

Project I Project II
Material 200,000 lbs. 220,000 lbs.
Labor 80,000 hrs. 60,000 hrs.
Energy 40,000 kwh 40,000 kwh

Input prices are expected to remain the same for the coming year.

Required:
1. Compute the partial operational productivity measures for the most recently completed year and
each project. Does either proposal improve technical efficiency? Explain. Can you make a
recommendation about either project using only the physical measures?
2. Calculate the profit change for each proposal attributable to productivity changes. Which
proposal offers the best outcome for the company? How does this relate to the concept of price
efficiency? Explain.

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Quiz V
Topic VI: Productivity Analysis
Productivity; Tradeoffs; Price Recovery. Kathy Shorts, president of Carbon Industrial Cleaners, had just
concluded a meeting with two of her plant managers. She had told each of them that one of their high-
volume industrial cleaners was going to have a 50 percent increase in demand-next year-over this year’s
output (which is expected to be 50,000 barrels). A major foreign source of the material had been shut
down because of a trade embargo. It would be years before the source would be available again. The
result was twofold. First, the price of the material input was expected to quadruple. Second, many of the
less efficient competitors would leave the business, creating more demand and higher output prices-in
fact, output prices would double.

In discussing the situation with her plant managers, she reminded them that the automated process now
allowed them to increase the productivity of the material. By using more machine hours, evaporation
could be decreased significantly. (This was a recent development and would be operational by the
beginning of the new fiscal year.) There were, however, only two other feasible settings beyond the
current setting. The current usage of inputs for the 50,000-barrel output (current setting) and the input
usage for the other two settings are given below. The input usage for the remaining two settings is for an
output of 75,000 barrels. Inputs are measured in barrels for the material and in machine hours for the
equipment.

Current Setting A Setting B

Input quantities:
Material 125,000 75,000 150,000
Equipment 30,000 75,000 37,500

The current prices for this year’s inputs are $3 per barrel for materials and $12 per machine hour for the
equipment. The materials price will change for next year as explained, but the $12 rate for machine hours
will remain the same. The chemical is currently selling for $20 per barrel. Based on separate productivity
analyses, one plant manager chose Setting A and the other chose Setting B.

The manager who chose Setting B justified his decision by noting that it was the only setting that clearly
signaled an increase in both partial measures of productivity. The other manager agreed that Setting B
was an improvement but that Setting A was even better.

Required:
1. Prepare productivity profiles for the current year and for the two settings. Which of the two
settings signals an increase in productivity for both inputs?
2. Calculate the profits that will be realized under each setting for the coming year. Which setting
provides the greatest profit increase?
3. Calculate the profit change for each setting attributable to productivity changes. Which setting
offers the greatest productivity improvement? By how much? Explain why this happened.

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