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In 2006, Fleming Chemicals used the following input combination to produce 55,000 gallons of an
industrial solvent:
Materials
Labor
33,000 lbs.
66,000 hrs.
In 2007, Fleming again planned to produce 55,000 gallons of solvent and was considering two different
changes
in process, both of which would be able to produce the desired output. The following input combinations
are associated with each process change:
Materials
Labor
Change I
38,500 lbs.
44,000 hrs.
Change II
27,500 lbs.
55,000 hrs.
The following combination is optimal for an output of 55,000 units. However, this optimal input
combination is unknown to Fleming.
Materials
Labor
22,000 lbs.
44,000 hrs.
The cost of materials is $60 per pound, and the cost of labor is $15 per hour. These input prices hold for
2006 and 2007
Required:
1.
2. Compute the cost of 2006s productive inefficiency relative to the optimal input combination.
Repeat for 2007 proposed input changes. Will productivity improve from 2006 to 2007 for each
process change? If so, by how much? Explain. Include in your explanation a discussion of
changes in technical and allocative efficiency.
3. Since the optimal input combination is not known by Fleming, suggest a way to measure
productivity improvement. Use this method to measure the productivity improvement achieved
from 2006 to 2007. How does this measure compare with the productivity improvement measure
computed using the optimal input combination?.
Output
Input quantities:
Materials
Labor
Capital
Energy
Input prices:
Materials
Labor
Capital
Energy
2006
50,000
2007
60,000
50,000
200,000
$2,000,000
50,000
40,000
$8
$10
15%
$2
$10
$12
10%
$2
100,000
$5,000,000
150,000
Required:
1.
Calculate the productivity profile for each year. Can you say that productivity has improved?
Explain.
2. Calculate the total profit change from 2006 to 2007. How much of this change is attributable to
productivity? To price recovery?
3. Calculate the cost per unit for 2006 and 2007. Was the division able to decrease its per-unit cost
by at least $5.00? Comment on the relationship of competitive advantage and productive
efficiency.