15-27

GIVEN:
In 2007, Hepworth Products, Inc., used the following input combination to produce
8,000 units of output
Material 17600 lbs
Labor 16000 hrs
The following combination is optimal for an output of 8,000 units (but unknown
to Hepworth Products):
Material 8000 lbs
Labor 32000 hrs
The cost of materials is $40 per pound, and the cost of labor is $10 per hour.
These input prices hold for 2007 and 2008. In 2008, Carson Products again
produced 8,000 units, with the following input combination:

Material 9600 lbs

Labor 50000 hrs

Required
1 Compute the partial productivity ratios for each of the following:
a The actual inputs used in 2007.
b The actual inputs used in 2008.
c The optimal input combination.
2 Compute the cost of 2007’s productive inefficiency relative to the optimal
input combination.
3 By how much did profits increase because of improvements in productive
efficiency from 2007 to 2008?
4 How much additional improvement in profits is possible after 2008
(assuming input costs remain the same and output doesn’t change)?

Answer
1 Ratios*
Materials Labor
a 2007 (17600x$40) + (16000x$10) = $864000 0.455 0.5
b 2008 (9600x$40)+(50000x$10) = $884000 0.833 0.16
c Optimal (8000x$40)+(32000x$10) = $640000 1 0.25

*Output/Input = 8,000/17,600; 8,000/16,000 for 2007; 8,000/9,600;

8,000/50,000 for 2008; 8,000/8,000; 8,000/32,00 for optimal.

Materials productivity improved, and labor productivity declined. The

trade-Off would need to be valued to assess whether overall productivity
improved.

2 $864,000 – $640,000 = $224,000

3 $864,000 – $884,000 = ($20,000)

4 $884,000 – $640,000 = $244,000