At the end of 2014, Diatomic Company implemented a new labor process and redesigned its product with the expectation that input usage efficiency would increase. Now, at the end of 2015, 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:
A) $5,625 increase
B) $45,000 increase
C) $23,625 increase
D) $23,625 decrease

Question

At the end of 2014, Diatomic Company implemented a new labor process and redesigned its product with the expectation that input usage efficiency would increase. Now, at the end of 2015, 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: 
A) $5,625 increase 
B) $45,000 increase 
C) $23,625 increase 
D) $23,625 decrease

Quizplus · Accepted Answer

To calculate the productivity change, we need to calculate the difference between the value of output at the end of 2015 and the value of output at the end of 2014, divided by the value of output at the end of 2014, and then multiplied by 100 to express the change in percentage.

Value of output at end of 2014 = 750 units x $150 = $112,500

Value of output at end of 2015 = 850 units x $135 = $114,750

Productivity change = [($114,750 - $112,500)/$112,500] x 100% = 2% increase

The labor process and product redesign led to a 2% increase in productivity.

To calculate the dollar value of the productivity increase, we multiply the value of output at the end of 2014 by the productivity change.

Dollar value of productivity increase = 2% x $112,500 = $2,250

Therefore, the value of output at the end of 2015 is expected to be $114,750 + $2,250 = $117,000.

The difference between the value of output at the end of 2015 and the value of output at the end of 2014 is $117,000 - $112,500 = $4,500.

So the company experienced a $4,500 increase in output value as a result of the labor process and product redesign. However, the question asks for the increase in productivity, not the increase in output value.

To get the increase in productivity, we need to subtract the increase in input cost from the increase in output value, and then divide by the value of output at the end of 2014.

Increase in input cost = (400 hours x $15) - (300 hours x $12) = $1,500

Increase in productivity = ($4,500 - $1,500) / $112,500 x 100% = 2%

The increase in productivity is $23,625 x 2% = $472.50

So the best choice is C, $23,625 increase.

At the End of 2014, Diatomic Company Implemented a New