Rington Company is considering the acquisition of an automated system that would decrease the number of units scrapped because of poor quality. (This proposal is part of an ongoing effort to improve quality.) The production manager is pushing for the acquisition because he believes that productivity will be greatly enhanced—

particularly when it comes to labor and material inputs. Output and input data follow. The after-acquisition data are projections.

Current After Acquisition Output (units) 10,000 10,000 Output selling price $40 $40 Input quantities:

Materials (Ib) 40,000 35,000 Labor (hr) 20,000 15,000 Capital $20,000 $100,000 Energy (kwh) 10,000 25,000 Input prices:

Materials $4.00 $4.00 Labor $9.00 $9.00 Capital 10.00% 10.00%

Energy $2.50 $2.50 Required:

1. Compute the partial operational productivity ratios for materials and labor under each alternative. Is the production manager right in thinking that materials and labor productivity will increase with the automated system?

Compute the partial operational productivity ratios for all four inputs. Does the system improve productivity?

Determine the amount by which profits will change if the system is adopted.

Are the trade-offs among the inputs favorable? Comment on the system’s ability to improve productivity.