Question

Lillian Fok is president of Lakefront Manufacturing, a producer of bicycle tires. Fok makes 1,000 tires per day with the following resources.Labor: 400 hours per day @ $12.50 per hourRaw material: 20,000 pounds per day @ $1 per poundEnergy: $5,000 per dayCapital costs: $10,000 per daya) What is the labor productivity per labor-hour for these tires atLakefront Manufacturing?b) What is the multifactor productivity for these tires atLakefront Manufacturing?c) What is the percent change in multifactor productivity if Fokcan reduce the energy bill by $1,000 per day without cuttingproduction or changing any other inputs?

Answer 1

Answer:

(a) 2.5 tires per labor hour

(b) 0.025 tires per dollar

(c) Increases by 2.4%.

Explanation:

(a) Labor productivity per labor-hour:

= Output ÷ Input

= 1,000 per day ÷ 400 hours per day

= 2.5 tires per labor hour

(b) Cost of labor input:

= 400 hours per day × $12.50 per hour

= $5,000 per day

Cost of raw material:

= 20,000 pounds per day × $1 per pound

= $20,000 per day

Cost of energy input = $5,000 per day

Cost of capital input = $10,000 per day

Total input cost per day:

= Cost of labor input + Cost of raw material + Cost of energy input + Cost of capital input

= $5,000 + $20,000 + $5,000 + $10,000

= $40,000

Hence,

Multifactor productivity:

= Output ÷ input

= 1,000 tires ÷ $40,000

= 0.025 tires per dollar

(c) New energy input:

= Current energy input - Reduction in bill

= $5,000 - $1,000

= $4,000

All the other inputs remains constant,

Therefore,

New input per day:

= Cost of labor input + Cost of raw material + Cost of new energy input + Cost of capital input

= $5,000 + $20,000 + $4,000 + $10,000

= $39,000

New multi-factor productivity:

= Output ÷ New input

= 1,000 tires ÷ $39,000

= 0.0256 tires per dollar

Percentage change in multi-factor productivity:

= (New multifactor productivity - Previous multifactor productivity) ÷ previous multifactor productivity

= (0.0256 - 0.025) ÷ 0.025

= 0.024 or 2.4%

Hence, the multifactor productivity increases by 2.4%.