Question

A hamburger factory produces 60,000 hamburgers each week. The equipment used costs $10,000 and will remain productive for four years. The labor cost per year is $13,500.
A. What is the productivity measure of "units of output per solar of input" averaged over the four-year period?

B. The company has the option of purchasing equipment for $13,000, with an operating life of five years. It would reduce labor costs to $11,000 per year. Should it consider purchasing this equipment (using productivity arguments alone)?

Answer 1

Answer:

A. 195 hamburgers

B. Yes

Explanation:

The computation is shown below:

A. Productivity measure = (Annual output) ÷ (Annual labor cost + annual equipment cost)

where,

Annual output = 60,000 × 52 weeks = $3,120,000

Annual labor cost = $13,500

Annual equipment cost

= $10,000 ÷ 4

= $2,500

So, the productivity measure is

= ($3,120,000) ÷ ($13,500 + $2,500)

= 195 hamburgers

B. Productivity measure = (Annual output) ÷ (Annual labor cost + annual equipment cost)

where,

Annual output = 60,000 × 52 weeks = $3,120,000

Annual labor cost = $11,000

Annual equipment cost

= $13,000 ÷ 5

= $2,600

So, the productivity measure is

= ($3,120,000) ÷ ($11,000 + $2,600)

= 229 hamburgers

Since the productivity is increased from 195 hamburgers to 229 hamburgers so the equipment should be purchased.