Connie Baker, president of Fleming Chemicals, has just concluded a meeting with two of her plant managers. She told each that their product was going to have a 50 percent increase in demand next year over this year's output (which is expected to be 10,000 gallons). A major foreign source of the material had been shut down because of civil war. It would be years before the source would be available again. The result was twofold. First, the price of the material was expected to quadruple. Second, many of the less efficient competitors would leave the business, creating more demand and higher output prices-in fact, output prices would double.
In discussing the situation with her plant managers, she reminded them that the automated process now allowed them to increase the productivity of the material.
By using more machine hours, evaporation could be decreased significantly (this was a recent development and would be operational by the beginning of the new fiscal year). There were, however, only two other feasible settings beyond the current setting. The current usage of inputs for the 10,000 gallon output (current setting) and the input usage for the other two settings follow. The input usage for the remaining two settings is for an output of 15,000 gallons. Inputs are measured in gallons for the material and in machine hours for the equipment.
| Input quantities: |
Current Setting |
Setting A |
Setting B
|
|
Materials (gals.)
|
25,000
|
15,000
|
30,000
|
|
Equipment (hrs.)
|
6,000
|
15,000
|
7,500
|
The current prices for this year's inputs are $3 per gallon for materials and $12 per machine hour for the equipment. The materials price will change for next year as explained, but the $12 rate for machine hours will remain the same. The chemi- cal is currently selling for $20 per gallon. Based on separate productivity analyses, one plant manager chose Setting A, and the other chose Setting B.
The manager who chose Setting B justified his decision by noting that it was the only setting that clearly signaled an increase in both partial measures of productivity. The other manager agreed that Setting B was an improvement but that Setting A was even better.
Required
1. Calculate the partial measures of productivity for the current year and for the two settings. Which of the two settings signals an increase in productivity for both inputs?
2. Calculate the profits that will be realized under each setting for the coming year. Which setting provides the greatest profit increase?
3. Calculate the profit change for each setting attributable to productivity changes. Which setting offers the greatest productivity improvement? By how much? Explain why this happened. (Hint: Look at trade-offs.)