The Small Motors Division of Poison Company has recently engaged in a vigorous effort to reduce manufacturing costs by increasing productivity (through process innovation). Over the past several years, price competition has become very intense, and recent events called for another significant price decrease. Without the price decrease, the marketing manager estimates that the division's market share would drop by 30%. The marketing manager es¬

timates that a price decrease of $5.00 per unit is needed in 2001 to maintain market share.

(Since the market is expanding, maintaining the market share means an increase in units sold.) The small motors sold for $70 each in 2000. However, the divisional manager indi¬

cated that the revenues lost by the price decrease must be offset by increased cost efficiency.

Any further deterioration in profits could threaten the division's continued existence. Thus, in 2001, processes were reengineered in an effort to improve productivity. At the end of 2001, the divisional manager wanted an assessment of the effects of the process changes. To assess the changes in productive efficiency, the following data were gathered:

Required:
1. Calculate the productivity profile for each year. Can you say that productivity has im¬
proved? Explain.
2. Calculate the total profit change from 2000 to 2001. How much of this change is attrib¬
utable to productivity? To price recovery?
3. Calculate the cost per unit for 2000 and 2001. Was the division able to decrease its perunit cost by at least $5.00? Comment on the relationship of competitive advantage and productive efficiency.

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2000 2001 Output Input quantities: 50,000 60,000 Materials 50,000 40,000 Labor 200,000 100,000 Capital $2,000,000 $5,000,000 Energy 50,000 150,000 Input prices: Materials $8.00 $10.00 Labor $10.00 $12.00 Capital 15% 10% Energy $2.00 $2.00