The battery division of Chalmur Company has recently engaged in a vigorous effort to increase productivity. Over the past several years, competition had intensified, indicating to the divisional manager that a significant price decrease for Chalmur's batteries was in order. Otherwise, the division would lose at least 50 percent of its market share.
To maintain its market share, Chalmur had to decrease its per-unit price by $2.50 by the end of 2006. Decreasing the price by $2.50, however, necessitated a similar increase in cost efficiency. If divisional profits dropped by $2.50 per unit, the division's continued existence would be in question. To assess the outcome of the productivity improvement program, the following data were gathered:
| |
2007 |
2008 |
|
Output
|
400,000
|
500,000
|
|
Input quantities:
|
|
|
|
Materials (lbs.)
|
100,000
|
100,000
|
|
Labor (hrs.)
|
400,000
|
200,000
|
|
Capital
|
$4,000,000
|
$10,000,000
|
|
Energy (kwhs.)
|
100,000
|
300,000
|
|
Input prices:
|
|
|
|
Materials
|
$2.00
|
$3.00
|
|
Labor
|
$8.00
|
$10.00
|
|
Capital
|
15%
|
10%
|
|
Energy
|
$2.00
|
$2.00
|
Required
1. Calculate the partial productivity ratios for each year. Can you say that produc- tivity has improved? Explain.
2. Calculate the profit change attributable to productivity changes.
3. Calculate the cost per unit for 2007 and 2008. Was the division able to decrease its per-unit cost by at least $2.50? Comment on the relationship between com- petitive advantage and productive efficiency.