Fowler Company produces handcrafted leather purses. Virtually all of the manufacturing cost consists of labor and materials. Over the past several years, profits have been declin¬

ing because the cost of the two major inputs has been increasing. Wilma Fowler, the presi¬

dent 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 2001, Wilma implemented a new cutting and assembly process that promised less material waste and a faster production time. At the end of 2001, Wilma wants to know how much profits have changed from the prior year because of the new process.

In order to provide this information to Wilma, the controller of the company gathered the following data;

Required:
1. Compute the productivity profile for each year. Comment on the effectiveness of the new production process.
2. Compute the increase in profits attributable to increased productivity.
3. Calculate the price-recovery component, and comment on its meaning.

Transcribed Image Text:

2000 2001 Unit selling price $16 $16 Purses produced and sold 18,000 24,000 Materials used 36,000 40,000 Labor used 9,000 10,000 Unit price of materials $4 $4.50 Unit price of labor $9 $10.00