At the end of 20X1, Gilley Company implemented a new labour process and redesigned its product with the expectation that input usage efficiency would increase. Now, at the end of 20X2, the president of the company wants an assessment of the changes on the company’s productivity. The data needed for the assessment are as follows:
$\begin{array}{lrr}
&20 \times 1 & 20 \times 2\
\text { Output } & 30,000 & 36,000 \
\text { Output prices } & \$ 10 & \$ 10 \
\text { Materials (kg) } & 15,000 & 15,300 \
\text { Materials unit price } & \$ 3 & \$ 4 \
\text { Labour (hrs.) } & 12,000 & 11,250 \
\text { Labour rate per hour } & \$ 5 & \$ 5 \
\text { Power (kwh) } & 7,500 & 9,750 \
\text { Price per kwh } & \$ 2 & \$ 3
\end{array}$
-Refer to the figure.By how much did profit change as a result of profitability changes in power?
A)$18,000 decrease
B)$6,750 decrease
C)$2,250 decrease
D)$2,250 increase

Question

Quizplus · Accepted Answer

The change in power cost is calculated by comparing the cost in 20X1 and 20X2. In 20X1, power cost was 7,500 kwh * $2 = $15,000. In 20X2, it was 9,750 kwh * $3 = $29,250. The increase in power cost is $29,250 - $15,000 = $14,250. However, the increase in output from 30,000 to 36,000 units should be considered. The power cost per unit in 20X1 was $15,000/30,000 = $0.50, and in 20X2 it was $29,250/36,000 = $0.8125. The increase in cost per unit is $0.3125. For 36,000 units, the increased cost is 36,000 * $0.3125 = $11,250. The change in profit due to power cost is $11,250 - $9,000 (the cost increase due to the price change alone) = $2,250 decrease.

At the End of 20X1, Gilley Company Implemented a New