Question:
PRODUCTIVITY MEASUREMENT, PRICE RECOVERY
The Small Motors Division of Polson Company has recently engaged in a vigorous effort to reduce manufacturing costs by increasing productivity (through process innovation). Over the past several years, price competition has become very intense, and recent events called for another significant price decrease. Without the price decrease, the marketing manager estimates that the division's market share would drop by 30 percent. The marketing manager estimates that a price decrease of $5.00 per unit is needed in 2007 to maintain market share. (Since the market is expanding, maintaining the market share means an increase in units sold.) The small motors sold for $70 each in 2006. However, the divisional manager indicated that the revenues lost by the price decrease must be offset by increased cost efficiency. Any further deterioration in profits could threaten the division's continued existence. Thus, in 2007, processes were reengineered in an effort to improve productivity. At the end of 2007, the divisional manager wanted an assessment of the effects of the process changes. To assess the changes in productive efficiency, the following data were gathered:
|
|
2006
|
2007
|
|
Output
|
50,000
|
60,000
|
|
Input quantities:
|
|
|
|
Materials
|
50,000
|
40,000
|
|
Labor
|
200,000
|
100,000
|
|
Capital
|
$2,000,000
|
$5,000,000
|
|
Energy
|
50,000
|
150,000
|
|
Input prices:
|
|
|
|
Materials
|
$8
|
$10
|
|
Labor
|
$10
|
$12
|
|
Capital
|
15%
|
10%
|
|
Energy
|
$2
|
$2
|
Required:
1. Calculate the productivity profile for each year. Can you say that productivity has improved? Explain.
2. Calculate the total profit change from 2006 to 2007. How much of this change is attributable to productivity? To price recovery?
3. Calculate the cost per unit for 2006 and 2007. Was the division able to decrease its per-unit cost by at least $5.00? Comment on the relationship of competitive advantage and productive efficiency.