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

Exercise 45

Partial Operational and Financial Productivity Varceles Design has decided to experiment with two alternative manufacturing approaches, identified as MF and LI, for producing men’s fashions. The firm expects the total demand to be 20,000 suits. Management estimates the required input resources using different manufacturing approaches are:

Materials (yds.) Labor (hrs.)
MF	300,000	100,000
LI	200,000	120,000

The cost of materials is $8 per yard; the cost of labor is $25 per hour.

Required

1. Compute the partial operational productivity ratios for each of the production approaches. Which approach would you select based on the partial operational productivity ratios?

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2. Calculate the partial financial productivity ratios for each of the production approaches. Which approach would you select based on the partial financial productivity ratios?

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3. Compute the total productivity ratios for each of the production approaches. Which approach would you select based on the total productivity ratios?

Step 1 of 3

1.?Operational Partial Productivity

	MF	LI	Difference
DM	20,000 / 300,000 = 0.0667	20,000 /200,000 = 0.1	0.0333 F*
DL	20,000 / 100,000 = 0.2	20,000/120,000= 0.1667	0.0333 U

??* The direction of variances denotes the advantage of LI over MF.

It is not clear which is the better of the two approaches. The operational partial productivity shows that LI has a higher productivity in direct materials while MF yields a higher direct labor productivity.