Question

ABC Corporation makes small parts from steel alloy sheets. Management has the flexibility to substitute direct materials for direct manufacturing labor and vice versa. If workers cut the steel carefully, more parts can be manufactured from a metal sheet, but this requires additional direct manufacturing labor hours. Alternatively, ABC can use fewer labor hours if it is willing to tolerate more waste of direct materials. ABC decided to improve materials productivity this year and the following provides information for the current and prior year:

	Prior Year				Current Year
Output units		400,000				490,000
Direct manufacturing labor hours		10,000				13,500
Wages per hour	$	26			$	24
Direct materials used		160	tons			180	tons
Direct materials cost per ton	$	3,375			$	3,250

Required:

1. Compute the partial financial productivity for both direct materials and direct labor for each of the 2 years.

2. Calculate ABC’s combined direct labor and direct material productivity in units per dollar in each of the 2 years.

(For all requirements, round your answers to 4 decimal places.)

Answer 1

1.

Prior year:

Direct material partial financial productivity = Total output units / Total direct material costs

Direct material partial financial productivity = 400,000 / 540,000 (160*$3,375) = 0.7407

Direct labor partial financial productivity = Total output units / Total direct labor costs

Direct labor partial financial productivity = 400,000 / 260,000 (10,000*$26) = 1.5385

Current year:

Direct material partial financial productivity = 490,000/ 585,000 (180*$3,250) = 0.8376

Direct labor partial financial productivity = 490,000 / 324,000 (13,500*$24) = 1.5123

2.

Prior year:
ABC's combined productivity = Total output units / Total combined costs

ABC's combined productivity = 400,000 / 800,000 (540,000+260,000) = 0.5000

Current year:

ABC's combined productivity = Total output units / Total combined costs

ABC's combined productivity = 490,000 / 909,000 (585,000+324,000) = 0.5390