Charles Lackey operates a bakery in Idaho Falls, Idaho. Because of its excellent
ID: 395671 • Letter: C
Question
Charles Lackey operates a bakery in Idaho Falls, Idaho. Because of its excellent product and excellent location, demand has increased by 45% in the last year. On far too many occasions, customers have not been able to purchase the bread of their choice. Because of the size of the store, no new ovens can be added. At a staffmeeting, one employee suggested ways to load the ovens differently so that more loaves of bread can be baked at one time. This new process will require that the ovens be loaded by hand, requiring additional manpower. This is the only production change that will be made in order to meet the increased demand. The bakery currently makes 1,500 loaves per month. Employees are paid $8 per hour. In addition to the labor cost, Charles also has a constant utility cost per month of $600 and a per loaf ingredient cost of $0.50.
Current multifactor productivity for 640 work hours per month =______ loaves/dollar (round your response to three decimal places).
After increasing the number of work hours to 928 per month, the multifactor productivity =_____ loaves/dollar (round your response to three decimal places).
The percentage increase in productivity =_____ % (enter your response as a percentage rounded to two decimal places).
Explanation / Answer
Given values:
Current production = 1,500 loaves per month
Labor cost = $8 per hour
Constant utility cost = $600 per month
Ingredient cost = $0.50 per loaf
Increase in demand = 45%
Solution:
(a) Current multi-factor productivity for 640 work hours per month is calculated as;
Multi-factor productivity = Total output / Total input in dollars
Total input in dollars = Labor cost + Utility cost + Ingredient cost
Multi-factor productivity = Total output / (Labor cost + Utility cost + Ingredient cost)
Multi-factor productivity = 1500 / [(640 x $8) + $600 + (1500 x $0.50)]
Multi-factor productivity = 1500 / 6470
Multi-factor productivity = 0.232 loaves/dollar
(b) New multi-factor productivity for 928 work hours per month is calculated as;
Current production = 1,500 loaves per month
Increased production = 1500 + (1500 x 45/100) = 2,175 loaves per month
Multi-factor productivity = Total output / (Labor cost + Utility cost + Ingredient cost)
Multi-factor productivity = 2175 / [(928 x $8) + $600 + (2175 x $0.50)]
Multi-factor productivity = 2175 / 9111.5
Multi-factor productivity = 0.239 loaves/dollar
(c) The percentage increase in productivity is calculated as;
Percentage increase in productivity = [(New productivity - Old productivity) / Old productivity] x 100
Percentage increase in productivity = [(0.239 - 0.232) / 0.232] x 100
Percentage increase in productivity = 3.02%