Norton Company produces handcrafted leather belts. Virtually all the manufacturing cost consists of materials and labor. Over the past several years, profits have been declining because the cost of the two major inputs has been increasing. Barry Norton, the president of the company, has indicated that the price of the belts cannot be increased; thus, the only way to improve or at least stabilize profits is by in- creasing overall productivity. At the beginning of 2001, Barry implemented a new productivity program. To encourage greater attention to productivity, Barry estab- lished a bonus pool, equal to 10 percent of the productivity gains. Barry now wants to know how much profits have increased from the prior year because of the pro- ductivity program. In order to provide this information to the president, the fol- lowing data have been gathered:

2000 2001 Unit selling price $32 $32 Output produced and sold 100,000 120,000 Materials used (lbs) 200,000 200,000 Labor used (hrs) 50,000 50,000 Unit price of materials $8 $9 Unit price of labor $9 $10 Required:

1. Compute the partial productivity ratios for each year. Comment on the effec- tiveness of the productivity improvement program. 2. Compute the increase in profits attributable to increased productivity, net of gainsharing.

3. Calculate the price-recovery component and comment on its meaning. Ignore the bonus cost in this calculation.