Kathy Shorts, president of Carbon Industrial Cleaners, had just concluded a meeting with two of her plant managers. She had told each of them that one of their high-volume indus¬

trial cleaners was going to have a 50% increase in demand—next year—over this year's out¬

put (which is expected to be 50,000 barrels). A major foreign source of the raw material had been shut down because of a trade embargo. It would be years before the source would be available again. The result was twofold. First, the price of the raw material was expected to quadruple. Second, many of the less efficient competitors would leave the business, creat¬

ing more demand and higher output prices—in fact, output prices would double.

In discussing the situation with her plant managers, she reminded them that the auto¬

mated process now allowed them to increase the productivity of the raw material. By using more machine hours, evaporation could be decreased significantly. (This was a recent de¬

velopment and would be operational by the beginning of the new fiscal year.) There were, however, only two other feasible settings beyond the current setting. The current usage of inputs for the 50,000-barrel output (current setting) and the input usage for the other two settings are given below. The input usage for the remaining two settings is for an output of 75,000 barrels. Inputs are measured in barrels for the material and in machine hours for the equipment.

The current prices for this year's inputs are $3 per barrel for materials and $12 per ma¬
chine hour for the equipment. The materials price will change for next year as explained, but the $12 rate for machine hours will remain the same. The chemical is currently selling for $20 per barrel. Based on separate productivity analyses, one plant manager chose Set¬
ting A and the other chose Setting B.
The manager who chose Setting B justified his decision by noting that it was the only setting that clearly signaled an increase in both partial measures of productivity. The other manager agreed that Setting B was an improvement but that Setting A was even better.
Required:
1. Prepare productivity profiles for the current year and for the two settings. Which of the two settings signals an increase in productivity for both inputs?
2. Calculate the profits that will be realized under each setting for the coming year. Which setting provides the greatest profit increase?
3. Calculate the profit change for each setting attributable to productivity changes. Which setting offers the greatest productivity improvement? By how much? Explain why this happened.

Transcribed Image Text:

Current Setting A Setting B Input quantities: Material 125,000 75,000 150,000 Equipment 30,000 75,000 37,500