Question

Profit-Linked Productivity Measurement

In 20x2, Choctaw Company implements a new process affecting labor and materials.

Choctaw Company provides the following information so that total productivity can be valued:

	20x1	20x2
Number of units produced	570,000	480,000
Labor hours used	190,000	240,000
Materials used (lbs.)	2,850,000	1,600,000
Unit selling price	$21	$23
Wages per labor hour	$13	$15
Cost per pound of material	$3.80	$3.90

Required:

1. Calculate the cost of inputs in 20x2, assuming no productivity change from 20x1 to 20x2. If required, round your answers to the nearest dollar.

Cost of labor	$
Cost of materials
Total PQ cost	$

2. Calculate the actual cost of inputs for 20x2. If required, round your answers to the nearest dollar.

Cost of labor	$
Cost of materials
Total current cost	$

What is the net value of the productivity changes? If required, round your answers to the nearest dollar.
$

How much profit change is attributable to each input's productivity change? If an item is negative, use a minus (-) sign to indicate.

Labor productivity change	$
Materials productivity change	$

3. What if a manager wants to know how much of the total profit change from 20x1 to 20x2 is attributable to price recovery? Calculate the total profit change.
$

Calculate the price-recovery component.
$

Answer 1

1.

cost of labor	= 240,000*13 = $3,120,000
cost of materials	=1,600,000 *3.80 = $6,080,000
Total PQ cost	$9,200,000

2.

Cost of labor	= 240,000*15 = $ 3,600,000
Cost of materials	= 1,600,000 *3.90 = $6,240,000
Total current cost	$9,840,000

Labor productivity in 20x1 = (570,000* 21)/ 190,000 = 63

Labor productivity in 20x2 = (480,000*23)/240,000 = 46

Labor productivity change = 46 - 63 = -17

Material productivity in 20x1 = (570,000* 21)/ 2,850,000= 4.20

material productivity in 20x2 = (480,000*23) /1,600,000 = 6.90

Material productivity change = 4.20 - 6.90 = - 2.70

3. Total profit = Total Revenue - Total cost

Total profit in 20x1 = 570,000*21 -(190,000*13+2,850,000*3.80) = - 1,330,000

Total profit in 20x2 = 480,000*23 -(240,000*15 + 1,600,000 *3.90) = 1200000

Total profit change = 1200000 - (-1,330,000) = 2,530,000