Question

A company has introduced a process improvement that reduces processing time for each unit; output is increased by 40 percent with less material, but two additional workers are required. Under the old process, five workers could produce 160 units per hour. Labor costs are $20/hour, and material input was previously $15/unit. For the new process, material is now $12/unit. *Overhead is charged at 1.8 times direct labor cost. *Finished units sell for $45 each. QUESTION: What increase in productivity is associated with the process improvement?

Answer 1

As per Old Process -

Output = 160 units per hour

Output Value = 160*45 = 7200

Number of Workers = 5

Labor Cost = 5*20 = 100

Material Cost = 15*160 = 2400

Overhead Cost = 100*1.80 = 180

Input = Total Cost = 100+2400+180 = 2680

Productivity = Output/Input

Productivity = 7200/2680

Productivity = 2.6866

As per New Process -

Output = 160*(1+40%) = 224 units per hour

Output Value = 224*45 = 10080

Number of Workers = 5+2 = 7

Labor Cost = 7*20 = 140

Material Cost = 12*224 = 2688

Overhead Cost = 140*1.80 = 252

Input = Total Cost = 140+2688+252 = 3080

Productivity = Output/Input

Productivity = 10080/3080

Productivity = 3.2727

Increase in Productivity = (3.2727 - 2.6866)*100/2.6866

Increase in Productivity = 21.82%