Solved: The Small Motors Division of Polson Company has

recently engaged
The Small Motors Division of Polson Company has recently engaged

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 per unit is needed in 2010 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 2009. 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 2010,
processes were reengineered in an effort to improve productivity. At the end of 2010, 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:

Required:
1. Calculate the productivity profile for each year. Can you say that productivity has improved?
Explain.
2. Calculate the total profit change from 2009 to 2010. How much of this change is attributable
to productivity? To price recovery?
3. Calculate the cost per unit for 2009 and 2010. Was the division able to decrease its per-unit
cost by at least $5? Comment on the relationship of competitive advantage and
productiveefficiency.

The Small Motors Division of Polson Company has recently engaged

ANSWER
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