, CHAPTER ONE Creating Value through Operations
Chapter
1 Creating Value through Operations
PROBLEMS
1. Suds and Duds Laundry
a. Labor productivity
Number of Input Output Output/Input
Week Workers (Labor-hours) (Shirts) Ratio
1 2 24 68 2.83 shirts/hour
2 2 46 130 2.83 shirts/hour
3 3 62 152 2.45 shirts/hour
4 3 51 125 2.45 shirts/hour
5 2 45 131 2.91 shirts/hour
b. Output per person does not vary much whether it is Sud, Dud, or Jud working. Productivity
declines when all three are present. Perhaps there isn’t enough work to keep three persons
occupied, or perhaps there is not enough work space or equipment to accommodate three
workers.
2. Smartphones
Value of Output: $300
Value of Input: Labor + Materials + Overhead
Ouput $300
Productivity = = = 2.000
Input $30 + $70 + $50
10% productivity improvement → 2.00 × 110 . = 2.200
Given productivity = 2.20 , and the value of output = $300, we solve for the cost of inputs:
Ouput $300
Productivity = = = 2.20
Input Input
$300
Input = = $136.36 or $136
2.2
The cost of inputs must decrease by ($150 − $136 ) = $14 .
Copyright © 2016 Pearson Education Canada Inc. 1
,CHAPTER ONE Creating Value through Operations
a. A $14 reduction in material costs is $14 $70 = 20.00%
b. A $14 reduction in labor costs is $14 $30 = 46.67%
c. A $14 reduction in overhead is $14/$50 = 28.00%
3. Alyssa’s Custom Cakes
a.
5 Birthday cakes x $50 per cake = $250
2 Wedding cakes x $150 per cake = $300
3 Specialty cakes x $100 per cake = $300
Total monthly revenue = $850
Multifactor productivity ratio = output/input
1.25 = $850/x
Solve for x = $850/1.25 = $680
Total costs = $680
Average cost per cake = $680/10 = $68/cake
b. Labor productivity
Birthday cake = $50/ 1.5 hours = $33.30/hour
Wedding Cake = $150/ 4 hours = $37.50/hour
Specialty Cake = $100/1 hours = $100/hour
c. Based on labor productivity, Alyssa should try to sell specialty cakes the most.
d. Yes, Alyssa should stop selling birthday cakes. Based on answer a, she loses $68 - $50 = $18
every time she sells a birthday cake.
4. Big Black Bird Company
The Big Black Bird Company problem is based on a product made by Raven Industries.
None of the numbers are representative of actual costs or volume.
a. Multifactor Productivity
Original Situation:
Value of output: (2500 uniforms × $200) = $500,000
Value of input: (2500 uniforms × $120) = $300,000
Productivity ratio:
Ouput $500,000
Productivity = = = 167
.
Input $300,000
2 Copyright © 2016 Pearson Education Canada Inc.
, CHAPTER ONE Creating Value through Operations
Overtime Situation:
Value of output: (4000 uniforms × $200) = $800,000
Value of input: (4000 uniforms × $144) = $576,000
Productivity ratio:
Ouput $800,000
Productivity = = = 139
.
Input $576,000
Productivity decreases by:
1.67 − 1.39
×100% = 16.77%
1.67
b. Labor Productivity
Original Situation:
Value of output (from part a) is: $500,000
Labor-hours of input: ( 70 × 40 hours) + (30 × 40 hours) = 4000 hours
Labor productivity = $500,000 4000 hours = $125 hour
Overtime Situation:
Value of output (from part a) is: $800,000
Labor-hours of input: ( 7 0 × 7 2 h o u r s ) + (3 0 × 7 2 h o ur s ) = 7 2 0 0 h o u r s
Labor productivity =$800, hours = $111.11/hours
Labor productivity decreases by:
(125/111.11) / 125 x 100% = 11.1%
c. Gross profits
Original Situation: $500,000 − $300,000 = $200,000
Overtime Situation: $800,000 − $576,000 = $224,000
Weekly profits increased.
5. Morning Brew Coffee Shop
Excel used to perform all calculations
a. Current labor and multifactor productivity
Regular Vienna
Currently Cappuccino total
Coffee coffee
Output in dollars $700.00 $300.00 $600.00 $1,600.00
Labor cost $320.00
Material cost $175.00 $75.00 $187.50 $437.50
Equipment cost $125.00
Overhead cost $225.00
Profit $492.50
Labor Productivity 5.0000
Multifactor Productivity 1.4447
Copyright © 2016 Pearson Education Canada Inc. 3
Chapter
1 Creating Value through Operations
PROBLEMS
1. Suds and Duds Laundry
a. Labor productivity
Number of Input Output Output/Input
Week Workers (Labor-hours) (Shirts) Ratio
1 2 24 68 2.83 shirts/hour
2 2 46 130 2.83 shirts/hour
3 3 62 152 2.45 shirts/hour
4 3 51 125 2.45 shirts/hour
5 2 45 131 2.91 shirts/hour
b. Output per person does not vary much whether it is Sud, Dud, or Jud working. Productivity
declines when all three are present. Perhaps there isn’t enough work to keep three persons
occupied, or perhaps there is not enough work space or equipment to accommodate three
workers.
2. Smartphones
Value of Output: $300
Value of Input: Labor + Materials + Overhead
Ouput $300
Productivity = = = 2.000
Input $30 + $70 + $50
10% productivity improvement → 2.00 × 110 . = 2.200
Given productivity = 2.20 , and the value of output = $300, we solve for the cost of inputs:
Ouput $300
Productivity = = = 2.20
Input Input
$300
Input = = $136.36 or $136
2.2
The cost of inputs must decrease by ($150 − $136 ) = $14 .
Copyright © 2016 Pearson Education Canada Inc. 1
,CHAPTER ONE Creating Value through Operations
a. A $14 reduction in material costs is $14 $70 = 20.00%
b. A $14 reduction in labor costs is $14 $30 = 46.67%
c. A $14 reduction in overhead is $14/$50 = 28.00%
3. Alyssa’s Custom Cakes
a.
5 Birthday cakes x $50 per cake = $250
2 Wedding cakes x $150 per cake = $300
3 Specialty cakes x $100 per cake = $300
Total monthly revenue = $850
Multifactor productivity ratio = output/input
1.25 = $850/x
Solve for x = $850/1.25 = $680
Total costs = $680
Average cost per cake = $680/10 = $68/cake
b. Labor productivity
Birthday cake = $50/ 1.5 hours = $33.30/hour
Wedding Cake = $150/ 4 hours = $37.50/hour
Specialty Cake = $100/1 hours = $100/hour
c. Based on labor productivity, Alyssa should try to sell specialty cakes the most.
d. Yes, Alyssa should stop selling birthday cakes. Based on answer a, she loses $68 - $50 = $18
every time she sells a birthday cake.
4. Big Black Bird Company
The Big Black Bird Company problem is based on a product made by Raven Industries.
None of the numbers are representative of actual costs or volume.
a. Multifactor Productivity
Original Situation:
Value of output: (2500 uniforms × $200) = $500,000
Value of input: (2500 uniforms × $120) = $300,000
Productivity ratio:
Ouput $500,000
Productivity = = = 167
.
Input $300,000
2 Copyright © 2016 Pearson Education Canada Inc.
, CHAPTER ONE Creating Value through Operations
Overtime Situation:
Value of output: (4000 uniforms × $200) = $800,000
Value of input: (4000 uniforms × $144) = $576,000
Productivity ratio:
Ouput $800,000
Productivity = = = 139
.
Input $576,000
Productivity decreases by:
1.67 − 1.39
×100% = 16.77%
1.67
b. Labor Productivity
Original Situation:
Value of output (from part a) is: $500,000
Labor-hours of input: ( 70 × 40 hours) + (30 × 40 hours) = 4000 hours
Labor productivity = $500,000 4000 hours = $125 hour
Overtime Situation:
Value of output (from part a) is: $800,000
Labor-hours of input: ( 7 0 × 7 2 h o u r s ) + (3 0 × 7 2 h o ur s ) = 7 2 0 0 h o u r s
Labor productivity =$800, hours = $111.11/hours
Labor productivity decreases by:
(125/111.11) / 125 x 100% = 11.1%
c. Gross profits
Original Situation: $500,000 − $300,000 = $200,000
Overtime Situation: $800,000 − $576,000 = $224,000
Weekly profits increased.
5. Morning Brew Coffee Shop
Excel used to perform all calculations
a. Current labor and multifactor productivity
Regular Vienna
Currently Cappuccino total
Coffee coffee
Output in dollars $700.00 $300.00 $600.00 $1,600.00
Labor cost $320.00
Material cost $175.00 $75.00 $187.50 $437.50
Equipment cost $125.00
Overhead cost $225.00
Profit $492.50
Labor Productivity 5.0000
Multifactor Productivity 1.4447
Copyright © 2016 Pearson Education Canada Inc. 3
