A company has introduced a process improvement that reduces

A company has introduced a process improvement that reduces processing time for each unit, so that output is increased by 30% with less material, but one additional worker required. Under the old process, four workers could produce 50 units per hour. Labor costs are $12/hour, and material input was previously $16/unit. For the new process, material is now $10/unit. Overhead is charged at 1.5 times direct labor cost. Finished units sell for $35 each.  

What increase (i.e., percent increase) in productivity is associated with the process improvement? (Show all your work.)

Solution

Details about old process :

Quantity produced in an hour = 50 units

Revenue generated from 50 units ( @ $35 each ) = $1750

Total labour cost per hour = $12 per labour x 4 labour = $48

Overhead cost ( @1.5 times labour cost ) = $48 x 1.5 = $72

Material cost = $16/ unit x 50 units = $800

Sum of all costs = $48 + $72 + $800 = $920

Productivity = Revenue / sum of all costs = 1750 / 920 = 1.902

Details about new process :

Revised quantity produced in n hour = 50 x 1.3 = 65 units

Revenue generated from 65 units ( @35 each ) = $2275

Total labour cost per hour ( after increase in manpower by 1 ) = $12 / hour x 5 labour = $60

Overhead cost ( @1.5 times the labour cost ) = $60 x 1.5 = $90

Material cost = $10/ unit x 65 units = $650

Sum of all costs = $60 + $90 + $650 = $800

Productivity = Revenue / sum of all costs = 2275/ 800 = 2.843

Percent increase in productivity

= ( New productivity – Old productivity ) / Old productivity x 100

= ( 2.843 – 1.902) / 1.902   x 100

=0.941/1.902 x 100

= 49.47%

PERCENT INCREASE IN PRODUCTIVITY ASSOCIATED WITH PROCESS IMPROVEMENT = 49.47%