The ABC Company Has A Large Order For Special Uniform 257153

The ABC Company has a large order for special uniforms to be used in an

The ABC Company has a large order for special uniforms to be used in an urgent operation. Working the normal two shifts of 40 hours each per week, the ABC production process typically produces 2,500 uniforms weekly at a standard cost of $120 each. Seventy employees work the first shift, and 30 employees work the second shift. The contract price per uniform is $200. Due to the urgent nature of the order, ABC has been authorized to operate around the clock, six days per week.

When each of the two shifts works 72 hours per week, production increases to 4,000 uniforms per week, but the cost per uniform rises to $144. In this scenario, the company aims to evaluate the impact of these operational changes on productivity and profitability.

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Understanding the implications of increased operational hours and associated cost changes on productivity and profitability is critical for ABC Company. This analysis will explore the effects on multifactor productivity, labor productivity, and weekly profits in response to the shift in production practices.

Analysis of Multifactor Productivity (MFP)

Multifactor productivity (MFP) measures the efficiency with which all inputs are used in the production process. It considers a combined measure of labor, capital, materials, and other inputs relative to output. In the initial scenario, ABC produces 2,500 uniforms at a total cost that can be calculated as follows:

  • Cost per uniform: $120
  • Total weekly cost: 2,500 units x $120 = $300,000

In the expanded scenario, production increases to 4,000 uniforms at a cost of $144 per unit:

  • Total weekly cost: 4,000 units x $144 = $576,000

To compute the multifactor productivity ratio, we consider the output (units produced) relative to total input costs. Initially, the MFP ratio is:

MFP initial = Output / Input Cost = 2,500 / 300,000 = 0.00833 units per dollar

After expansion, it becomes:

MFP new = 4,000 / 576,000 ≈ 0.00694 units per dollar

Comparing these two ratios, the multifactor productivity has decreased. The percentage change can be calculated as:

Percentage change = [(0.00694 - 0.00833) / 0.00833] * 100 ≈ -16.66%

This indicates that multifactor productivity declined by approximately 16.66%, reflecting a lower efficiency in resource utilization with increased production under higher costs.

Analysis of Labor Productivity

Labor productivity measures the output per labor hour. In the initial scenario, total hours worked per week are:

  • First shift: 70 employees x 40 hours = 2,800 hours
  • Second shift: 30 employees x 40 hours = 1,200 hours
  • Total: 4,000 hours

Production is 2,500 uniforms, thus labor productivity is:

Initial labor productivity = 2,500 units / 4,000 hours = 0.625 units per hour

In the expanded scenario, each shift works 72 hours. The total hours are:

  • First shift: 70 employees x 72 hours = 5,040 hours
  • Second shift: 30 employees x 72 hours = 2,160 hours
  • Total: 7,200 hours

Production increases to 4,000 units, so labor productivity is:

New labor productivity = 4,000 / 7,200 ≈ 0.556 units per hour

Comparing the two, labor productivity has decreased. The percentage change is:

Percentage change = [(0.556 - 0.625) / 0.625] * 100 ≈ -11.04%

This demonstrates an approximate 11.04% decline in labor productivity, indicating that while total output increased, the efficiency of labor input decreased under the new operating conditions.

Analysis of Weekly Profits

Profitability is derived from the difference between revenue and costs. The revenue for each scenario is calculated as the number of units produced multiplied by the contract price of $200:

  • Initial revenue: 2,500 units x $200 = $500,000
  • Expanded revenue: 4,000 units x $200 = $800,000

The weekly profit in each case is:

  • Initial profit: $500,000 - $300,000 = $200,000
  • Expanded profit: $800,000 - $576,000 = $224,000

Hence, weekly profits increased by:

Change in profit = ($224,000 - $200,000) / $200,000 * 100 = 12%

This signifies a 12% increase in weekly profits, primarily driven by increased output and sales despite higher per-unit costs.

Conclusion

Operational adjustments at ABC Company, including extended working hours across shifts, have led to mixed outcomes concerning productivity and profitability. While total output and profits increased, both multifactor and labor productivity ratios declined. This decrease highlights a decline in efficiency, emphasizing the importance of optimizing resource utilization. Companies facing such operational shifts should carefully evaluate cost structures and productivity metrics to ensure sustainable profitability and operational efficiency in the long term.

References

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