Khan Company produces handcrafted leather purses. Virtualy all of the manufacturing cost consists of materials and labor. Over the past several years, profits have been declining because of the cost of the two major inputs has been increasing. Lila Khan, the president of the company, has indicated that the price of the purses cannot be increased; thus, the only way to improve or at least stabilize profits is to increase overall productivity. At the beginning of 20x2, Lila implemented a new cutting and assembly process that promised less materials waste and a faster production time. At the end of 20x2, Lila wants to know how much profits have changed from the prior year because of the new process. In order to provide this information to Lila, the controller of the company gathered the following data: 20x1 20x2 Unit selling price $20 $20 Purses produced and sold 36,000 48,000 Materials used 72,000 80,000 Labor used 18,000 20,000 Unit price of materials $4 $5 Unit price of labor $9 $10 1. Computer the productivity profile for each year. Comment on the effectiveness of the new production process. 2. Computer the increase in profits attributable to increased productivity. 3. Calculate the price-recovery component, and comment on its meaning.
Khan Company produces handcrafted leather purses. Virtualy all of the
20x1 20x2 Unit selling price $20 $20 Purses produced and sold 36,000 48,000 Materials used 72,000 80,000 Labor used 18,000 20,000 Unit price of materials $4 $5 Unit price of labor $9 $10
1. Computer the productivity profile for each year. Comment on the effectiveness of the new production process.
2. Computer the increase in profits attributable to increased productivity.
3. Calculate the price-recovery component, and comment on its meaning.
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