Chapter 16, Problem 44P

1.

To determine

Prepare an overview contribution plan income statement for each of the two years, and measure the difference in operating income.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved. Financial productivity evaluates the output-to-cost relationship of one or more input resources. It is an indicator of the output unit or the output sales values of one or more resources produced per dollar. Partial productivity indices are as many as there are production factors. The most important and frequently used are the partial indices of labor and capital productivity. The partial productivity measures are measures of the nominal price value, physical measures and measurements of fixed price values. Measuring partial productivity concerns designed to measure solutions that do not satisfy the requirements of total productivity measurement, even so, if it will be feasible as total productivity indicators. Productivity describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases.

Compute the contribution plan income statement for each of the two years:

Particulars	Current year	Prior year
Sales:
Current year (20,000 × $40)	$800,000
Prior year (16,000 × $40)		$640,000
Variable cost of sales:
Materials (14,000 × $10); (13,000 × $8)	$140,000	$104,000
Labor (5,250 × $25); (6,000 × $20)	131,250	120,000
Power (2,000 × $2); (1,000 × $2)	4,000	2,000
Total variable cost of sales	$275,250	$226,000
Contribution margin	$524,750	$414,000

Calculate changes in profits from the prior year to the current year:

$\begin{array}{c}\text{Changes in profits}=\$524,750-\$414,000\\ =\$110,750\text{ Increase}\end{array}$

2.

To determine

For each year, calculate the partial operational productivity ratios for each production factor.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved. Financial productivity evaluates the output-to-cost relationship of one or more input resources. It is an indicator of the output unit or the output sales values of one or more resources produced per dollar. Partial productivity indices are as many as there are production factors. The most important and frequently used are the partial indices of labor and capital productivity. The partial productivity measures are measures of the nominal price value, physical measures and measurements of fixed price values. Measuring partial productivity concerns designed to measure solutions that do not satisfy the requirements of total productivity measurement, even so, if it will be feasible as total productivity indicators. Productivity describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases.

		Current year			Prior year
Units manufactured		20,000			16,000
Materials used		14,000			13,000
Number of labor hours used		5,250			6,000
Cost of materials used per pound		$10			$8
Direct labor wage rate/hr		$25			$20
Power used (kwh)		$ 2,000			$ 1,000
Cost of power (kwh)		$ 2			$ 2
Total materials cost		$140,000		= 14,000 × $10	$104,000
Total Labor cost		$131,250		= 5,250 × $25	$120,000
Total power cost		$4,000		= 2,000 × $2	$2,000
Financial partial productivity
Materials		0.142857		= 20,000/140,000	0.153846
Labor		0.152381		= 20,000/131,250	0.133333
Power		5.000000		= 20,000/4,000	8.000000
Operational partial productivity
Materials		1.42857		= 20,000/14,000	1.230769
Labor		3.80592		= 20,000/5,250	2.666667
Power		10.00000		= 20,000/2,000	16.000000
Current Output at prior year productivity
Materials		16,250		= 20,000/1.230769
Labor		7,500		= 20,000/2.666667
Power		1,250		= 20,000/16

The image given below represents the decomposition of partial productivity:

3.

To determine

Compute the partial financial productivity ratios for each production factor in each year.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved. Financial productivity evaluates the output-to-cost relationship of one or more input resources. It is an indicator of the output unit or the output sales values of one or more resources produced per dollar. Partial productivity indices are as many as there are production factors. The most important and frequently used are the partial indices of labor and capital productivity. The partial productivity measures are measures of the nominal price value, physical measures and measurements of fixed price values. Measuring partial productivity concerns designed to measure solutions that do not satisfy the requirements of total productivity measurement, even so, if it will be feasible as total productivity indicators. Productivity describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases.

		Current year			Prior year
Units manufactured		20,000			16,000
Materials used		14,000			13,000
Number of labor hours used		5,250			6,000
Cost of materials used per pound		$10			$8
Direct labor wage rate/hr		$25			$20
Power used (kwh)		$ 2,000			$ 1,000
Cost of power (kwh)		$ 2			$ 2
Total materials cost		$140,000		= 14,000 × $10	$104,000
Total Labor cost		$131,250		= 5,250 × $25	$120,000
Total power cost		$4,000		= 2,000 × $2	$2,000
Financial partial productivity
Materials		0.142857		= 20,000/140,000	0.153846
Labor		0.152381		= 20,000/131,250	0.133333
Power		5.000000		= 20,000/4,000	8.000000
Operational partial productivity
Materials		1.42857		= 20,000/14,000	1.230769
Labor		3.80592		= 20,000/5,250	2.666667
Power		10.00000		= 20,000/2,000	16.000000
Current Output at prior year productivity
Materials		16,250		= 20,000/1.230769
Labor		7,500		= 20,000/2.666667
Power		1,250		= 20,000/16

The image given below represents the decomposition of partial productivity:

4.

To determine

State the conclusions that will be drawn about the firm’s productivity last year relative to the current year.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved. Financial productivity evaluates the output-to-cost relationship of one or more input resources. It is an indicator of the output unit or the output sales values of one or more resources produced per dollar. Partial productivity indices are as many as there are production factors. The most important and frequently used are the partial indices of labor and capital productivity. The partial productivity measures are measures of the nominal price value, physical measures and measurements of fixed price values. Measuring partial productivity concerns designed to measure solutions that do not satisfy the requirements of total productivity measurement, even so, if it will be feasible as total productivity indicators. Productivity describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases.

		2016			2015
Units manufactured		750,000			1,000,000
Units of CT 140 used		900,000			1,050,000
Number of labor hours used		150,000			200,000
Cost of CT140 per unit		$156			$135
Direct labor wage rate/hr		$56			$62
Total materials cost		$ 140,400,000		= 900,000 × $156	$141,750,000
Total labor cost		$ 8,400,000		= 150,000 × $56	$ 12,400,000
Total materials and labor cost		$ 148,800,000			$154,150,000
Financial partial productivity
Materials		0.005342		= 750,000/140,400,000	0.007055
Labor		0.089286		= 750,000/8,400,000	0.080645
Operational partial productivity
Materials		0.83333		= 750,000/900,000	0.952381
Labor		5.00000		= 750,000/150,000	5.000000
Current Output at prior year productivity
Materials		787,500.00		= 750,000/.952381
Labor		150,000.00		= 750,000/5.0

Both direct materials and part-productivity direct operating labor changed from the previous year to the present year. In the current year the company has been able to produce more output units for each unit of materials placed in production and for every hour spent on production. Operational resource output decreased from that of the prior year in the current year. During the current year, the company is likely to have used more machinery during manufacturing that reduced material consumption and hours of manufacturing. Economic partial output for both direct and power materials decreased from the prior year. The rises in prices of direct materials were higher than the gains in partial operating efficiency for direct materials.

The financial partial productivity for direct labor improved. However, the scale of the changes is much smaller than the increase in partial efficiency for operations. In the current year, direct labor-operating partial efficiency increased by 42.8 percent over the previous years. Even so, financial partial efficiency increased between the two years by just 14.3 per cent. The decline in partial financial productivity is possibly due to increases in direct labor wage levels.

5.

To determine

Split the changes in the partial financial productivity ratio from prior year to the current year into changes in productivity, changes in input prices and changes in output.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved. Financial productivity evaluates the output-to-cost relationship of one or more input resources. It is an indicator of the output unit or the output sales values of one or more resources produced per dollar. Partial productivity indices are as many as there are production factors. The most important and frequently used are the partial indices of labor and capital productivity. The partial productivity measures are measures of the nominal price value, physical measures and measurements of fixed price values. Measuring partial productivity concerns designed to measure solutions that do not satisfy the requirements of total productivity measurement, even so, if it will be feasible as total productivity indicators. Productivity describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases.

		2016			2015
Units manufactured		750,000			1,000,000
Units of CT 140 used		900,000			1,050,000
Number of labor hours used		150,000			200,000
Cost of CT140 per unit		$156			$135
Direct labor wage rate/hr		$56			$62
Total materials cost		$ 140,400,000		= 900,000 × $156	$141,750,000
Total labor cost		$ 8,400,000		= 150,000 × $56	$ 12,400,000
Total materials and labor cost		$ 148,800,000			$154,150,000
Financial partial productivity
Materials		0.005342		= 750,000/140,400,000	0.007055
Labor		0.089286		= 750,000/8,400,000	0.080645
Operational partial productivity
Materials		0.83333		= 750,000/900,000	0.952381
Labor		5.00000		= 750,000/150,000	5.000000
Current Output at prior year productivity
Materials		787,500.00		= 750,000/.952381
Labor		150,000.00		= 750,000/5.0

6.

To determine

Mention that any further insight into the relative productivity of Company, C for the prior year and the current year will be generated by the detailed information provided by separating the change in the partial financial productivity rate.

Explanation of Solution

Productivity is the ratio between output and input. It is an indicator of the output produced per unit or per input dollar. It describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases. Both the input (denominator) and the output (numerator) may be in unit or dollar amount. Calculating productivity primarily aims at improving operation. Enhancements to high- value - added activities reduce the activity costs and/or enhance output value. Low-value - added activities should be eradicated rather than improved. Financial productivity evaluates the output-to-cost relationship of one or more input resources. It is an indicator of the output unit or the output sales values of one or more resources produced per dollar. Partial productivity indices are as many as there are production factors. The most important and frequently used are the partial indices of labor and capital productivity. The partial productivity measures are measures of the nominal price value, physical measures and measurements of fixed price values. Measuring partial productivity concerns designed to measure solutions that do not satisfy the requirements of total productivity measurement, even so, if it will be feasible as total productivity indicators. Productivity describes different measures of productive efficiency. Therefore, productivity improves when partial productivity increases.

		2016			2015
Units manufactured		750,000			1,000,000
Units of CT 140 used		900,000			1,050,000
Number of labor hours used		150,000			200,000
Cost of CT140 per unit		$156			$135
Direct labor wage rate/hr		$56			$62
Total materials cost		$ 140,400,000		= 900,000 × $156	$141,750,000
Total labor cost		$ 8,400,000		= 150,000 × $56	$ 12,400,000
Total materials and labor cost		$ 148,800,000			$154,150,000
Financial partial productivity
Materials		0.005342		= 750,000/140,400,000	0.007055
Labor		0.089286		= 750,000/8,400,000	0.080645
Operational partial productivity
Materials		0.83333		= 750,000/900,000	0.952381
Labor		5.00000		= 750,000/150,000	5.000000
Current Output at prior year productivity
Materials		787,500.00		= 750,000/.952381
Labor		150,000.00		= 750,000/5.0

In the current year, productivity increased for both raw products and direct labor costs. The % of productivity improvements are 12.86 (= .019780 ÷153846) and 34.29 (= .045714 ÷ 13333) of the productivity of the previous year for direct materials and direct labor, respectively. Cost increases in raw materials and direct labor, though, reduced productivity gains on these two sources of growth.