Hillock Company produces handcrafted wool ponchos. Virtually all the manufactur- ing cost consists of materials and labor. Over the past several years, profits have been declining because the cost of the two major inputs has been increasing. David Hillock, the president of the company, has indicated that the price of the sweaters cannot be increased; thus, the only way to improve or at least stabilize profits is to increase overall productivity. At the beginning of 2008, he implemented a new productivity program. To encourage greater attention to productivity, David established a bonus pool, equal to 10 percent of the productivity gains. David now wants to know how much profits have increased from the prior year because of the productivity program. In order to provide this information to the president, the following data have been gathered:
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2007
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2008
|
|
Unit selling price
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$80
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$80
|
|
Output produced and sold
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300,000
|
360,000
|
|
Materials used (lbs.)
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600,000
|
600,000
|
|
Labor used (hrs.)
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150,000
|
150,000
|
|
Unit price of materials
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$20
|
$22
|
|
Unit price of labor
|
$13
|
$15
|
Required
1. Compute the partial productivity ratios for each year. Comment on the effectiveness of the productivity improvement program.
2. Compute the increase in profits attributable to increased productivity, net of gainsharing.
3. Calculate the price-recovery component, and comment on its meaning. Ignore the bonus cost in this calculation.