Operation Management Systems

Templates - Exercise for Module 2

The School of Engineering, The University of South Australia
Dr. Sang-Heon LEE

Student name: Ana Erceg Student Group: C

Student ID: 110235423

Q1. A clothing company has opened four new stores. Data on monthly volume and labour hours are
given in the table below. Which stores has the highest labour productivity?

Store A B C D

Sales volume $40,000 $12,000 $60,000 $25,000

Labour hours 250 60 500 200

Labour productivity $160 $200 $120 $125

Answer:

Productivity= Output/Input
Where,
Output = sales volume
Input = labour hours

A = $40,000/250hrs= $160

B = $12,000/60hrs= $200

C = $60,000/500hrs= $120

D = $25,000/200hrs= $125

Therefore, Store B is the most productive.

Q2. (From Q1) The accountant suggested that rent and hourly rate should be also factored into the
productivity calculations. The hourly rate and rent are given in the below. Using this new data, do
the following.

A. Which store is most productive in terms of total productivity? The company is not sure
whether all four stored open. Based on the total productivity obtained, which store would
be closed?
Store A B C D
Sales volume $40,000 $12,000 $60,000 $25,000
Labour hours 250 60 500 200
Rent $1800 $2000 $1200 $800
Hourly rate for labour $6.75 $6.50 $6.00 $5.50
Labour cost $1,688 $390 $3,000 $1,100
Total cost $3,488 $2,390 $4,200 $1,900
Total productivity 11.47 5.02 14.29 13.16

Calculation Used:

Labour Cost = Labour Hours * Hourly Rate for Labour

Total Cost = Labour Cost + Rent

Productivity = Sales Volume / Total Cost

Most productive store: Store C The store to be closed: Store B

B. For the store selected to be closed in the question A above, what is the amount of sales the
store should be made to reach the same level of the productivity that is most productive,
obtained in the question A?

Need to get Store B productivity to = 14.29 (same as most productive Store C)

The amount of sales Store B would need $34,143 sales (14.29*$2,390 = $34,143)
Q3. The following table shows data on the average number of customers processed by some units in
the bank service each day. The income from the unit is the payment made by each customer, which
is $80 per each service. The hourly wage rate of staff in the unit is $25, the overhead rate is 30% of
labour cost, and the material cost is $5 per customer. Assume that that each employee works 8
hours per day.

Unit A B C D
Number of Staff (Labour) 6 4 9 7
Output (Customers/Day) 50 30 70 60

A. Compute the labour productivity and the total productivity for each unit.

Unit A B C D
Output Output ($) $ 4,000 $ 2,400 $ 5,600 $ 4,800
Labour
$ 1,200 $ 800 $ 1,800 $ 1,400
cost
Input
Overhead
  $ 360 $ 240 $ 540 $ 420
cost
 
Material
  $ 250 $ 150 $ 350 $ 300
cost
Total input $ 1,810 $ 1,190 $ 2,690 $ 2,120
Labour productivity 8.3333 7.5000 7.7778 8.5714
Total productivity 0.0276 0.0252 0.0260 0.0283

Output ($) = Customers per day * $80 per each service

Unit A = 50*$80 = $4000
Unit B = 30*$80 = $2400
Unit C = 70*$80 = $5600
Unit D = 60*$80 = $4800

Labour Cost = number of staff*hrs (8) * hourly wage ($25)

Unit A = 6*8*$25 = $1200
Unit B = 4*8*$25 = $800
Unit C = 9*8*$25 = $1800
Unit D = 7*8*$25 = $1400

Overhead Cost = overhead rate (0.3) * labour cost

Unit A = 0.3*$1200 = $360
Unit B = 0.3* $800 = $240
Unit C = 0.3*$1800 = $540
Unit D = 0.3* $1400 = $420

Material Cost = customers processed * material cost per customer ($5)

Unit A = 50*$5 = $250
Unit B = 30*$5 = $150
Unit C = 70*$5 = $350
Unit D = 60*$5 = $300
Total Input = Labour Cost + Overhead Cost + Material Cost
Unit A = $1200 + $360 + $250 = $1810
Unit B = $800 + $240 + $150 = $1190
Unit C = $1800 + $540 + $350 = $2690
Unit D = $1400 + $420 + $300 = $2120

Labour Productivity = Customers Processed / Employees

Unit A = 50/6 = 8.33
Unit B = 30/4 = 7.50
Unit C = 70/9 = 7.78
Unit D = 60/7 = 8.57

Total Productivity = Number Customer Processes / Total Input

Unit A = 50 / $1810 = 0.0276
Unit B = 30 / $1190 = 0.0252
Unit C = 70 / $2690 = 0.0260
Unit D = 60 / $2120 = 0.0283

B. Suppose a new, more standardized procedure is to be introduced that will enable each staff
to process two additional customer per day. Compute the expected labour and total
productivity for each unit with this new procedure.

Unit A B C D
Staff (Labour) 6 4 9 7
Current Customers/Day 50 30 70 60
Additional Customers/day 12 8 18 14
New number of Customers/day 62 38 88 74

Unit A: Old procedure Output per staff = 50 / 6 = 8.3

New procedure +2 = 10.3 customers per staff
Therefore Additional Customers/Day = 50 – (6*10.3) = 12
New number of customers/day = 50+12 = 62

Repeat formula for all Units

Unit A B C D
Output Output ($) $4,960 $3,040 $7,040 $5,920
Labour cost $1,200 $800 $1,800 $1,400
Input Overhead $360 $240 $540 $420
  cost
 
Material cost $310 $190 $440 $370
 
Total input $1,870 $1,230 $2,780 $2,190
Labour productivity 10.3333 9.5000 9.7778 10.5714
Total productivity 0.0332 0.0309 0.0317 0.0338
Same formulas as Part A.
Q4. OhWon industry maintains production facilities in several locations in the world and sell the
products in the local market and around the region. Average monthly cost data and output levels in
period 2 are given in the below.

A. Calculate the labour productivity of each facility.

B. Calculate total productivity of each facility. Based on the total productivity, if one of the
facilities should be closed, which one should be closed?

Facility A B C D
Finished products 45 55 30 40
Selling price for each product $2,400 $2,200 $2,000 $1,900
Labour cost (total) $25,000 $31,000 $21,000 $16,000
Material cost (per product) $250 $150 $200 $200
Energy cost (per product) $100 $90 $120 $80
Transportation cost (per product) $150 $250 $200 $350
Overhead cost (per product) $250 $180 $200 $100
Total income $108,000 $121,000 $60,000 $76,000
The cost per product (except labour) $750 $670 $720 $730
Total cost $33,750 $36,850 $21,600 $29,200
Labour productivity 4.32 3.90 2.86 4.75
Total productivity 3.20 3.28 2.78 2.60

Total Income = number finished product * Selling price

Facility A = 45*$2400 = $108,000
Facility B = 55*$2200 = $121,000
Facility C = 30*$2000 = $60,000
Facility D = 40*$1900 = $76,000

The Cost per product (except labour) = Material Cost + Energy Cost + Transportation Cost + Overhead Cost

Total Cost = Labour Cost * Number of Finished Product

Facility A = $25000 * 45 = $33750
Facility B = $31000 *55 = $36850
Facility C = $21000 * 30 = $21600
Facility D = $16000 * 40 = $29200

Labour Productivity = Total Income / Labour Cost

Facility A = $108,000 / $25000 = 4.32
Facility B = $121,000 / $31000 = 3.90
Facility C = $60,000 / $21000 / 30 = 2.86
Facility D = $76,000 / $16000 / 40 = 4.75

Total Productivity = Total Income / Total Cost

Facility A = $108,000 / $33750 = 3.20
Facility B = $121,000 / $36850 = 3.28
Facility C = $60,000 / $21600 = 2.78
Facility D = $76,000 / $29200 = 2.60

The facility to be closed: Facility D

 C. In period 3, it is found that the material cost has decreased as shown in the table below.
Calculate total productivity of each facility with this new material cost, assuming that all
other data are the same as the table given in the above.

Facility A B C D
Amount of savings in material
10% 5% 15% 20%
cost (% per product)
New material cost (per product) $225 $143 $170 $160
New cost with new material
$725 $663 $690 $690
cost (per product)
New Total cost $32,625 $36,438 $20,700 $27,600

New Total productivity 3.31 3.32 2.90 2.75

D. The owner of the company wants to have the facility D should have exactly the same total
productivity as that of facility A, obtained in the question C. To make it happen, he wants to
reduce the transportation cost of the facility D. What is the amount of savings it should have
in the transportation cost per product in the facility D, to make this happen?

Productivity A = Productivity B = 3.31

Find New T (Transportation Cost)

Cost Per Product D = $340 + T

So,

$76,000 / [(T+$340) * 40] = 3.31

$76,000 = 3.31 * [(T+$340) * 40]

$76,000 / (3.31 * 40) = T+ $340

$574 = T + $340

T = $234

Therefore, $350 –$234 = $116

The amount of savings will need to be $116