Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 41

Productivity Measurement, Technical and Allocative Efficiency, Partial Measures
Carsen Company produces handcrafted pottery that uses two inputs: materials and labor. During the past quarter, 24,000 units were produced, requiring 96,000 pounds of materials and 48,000 hours of labor. An engineering efficiency study commissioned by the local university revealed that Carsen can produce the same 24,000 units of output using either of the following two combinations of inputs:

The cost of materials is $8 per pound; the cost of labor is $12 per hour.
Required:
1. Compute the output-input ratio for each input of Combination F1. Does this represent a productivity improvement over the current use of inputs? What is the total dollar value of the improvement? Classify this as a technical or an allocative efficiency improvement.
2. Compute the output-input ratio for each input of Combination F2. Does this represent a productivity improvement over the current use of inputs? Now, compare these ratios to those of Combination F1. What has happened?
3. Compute the cost of producing 24,000 units of output using Combination F1. Compare this cost to the cost using Combination F2. Does moving from Combination F1 to Combination F2 represent a productivity improvement? Explain.