Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 30

Partial Financial Productivity and Total Productivity RFD Corporation makes small parts from steel alloy sheets. Management has the flexibility to substitute direct materials for direct manufacturing labor. If workers cut the steel carefully, more parts can be manufactured from a metal sheet, but this requires additional direct manufacturing labor-hours. Alternatively, RFD can use fewer direct manufacturing labor-hours if it is willing to tolerate more waste of direct materials. RFD provides this information for the years 2009 and 2010:

	2009	2010
Output units	400,000	486,000
Direct manufacturing labor-hours	10,000	13,500
Wages per hour	$26	$25
Direct materials used	160 tons	180 tons
Direct materials cost per ton	$3,375	$3,125

Required Carry all computations to four digits after the decimal point.

1. Compute the partial financial productivity for both manufacturing factors for 2009 and 2010.

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2. Calculate RFD’s total productivity in units per dollar in 2009 and 2010.

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3. Evaluate management’s decision in 2010 to substitute one production factor for another.

Step 1 of 4

Financial productivity: It can be defined as the benefit received from each 1 $ spend on the manufacturing process. It can be calculated by dividing the output received from the total costs incurred to receive the output.