Productivity Measurement, Technical and Allocative Efficiency, Partial Measures

Carsen Company produces handcrafted pottery that uses two inputs: materials and labor. During the past quarter, 22,000 units were produced, requiring 88,000 pounds of materials and 44,000 hours of labor. An engineering efficiency study commissioned by the local university revealed that Carsen can produce the same 22,000 units of output using either of the following two combinations of inputs:

	F1	F2
Combinations:
Materials	78,000	84,900
Labor	37,000	33,400

The cost of materials is $8 per pound; the cost of labor is $12 per hour.

Required:

1. Compute the output-input ratio for each input of Combination F1. If required, round your answers to two decimal places.

Materials	fill in the blank 1
Labor	fill in the blank 2

Does this represent a productivity improvement over the current use of inputs?

What is the total dollar value of the improvement? $fill in the blank 4

Classify this as a technical or an allocative efficiency improvement.

2. Compute the output-input ratio for each input of Combination F2. If required, round your answers to two decimal places.

Materials	fill in the blank 6
Labor	fill in the blank 7

Does this represent a productivity improvement over the current use of inputs?

Now, compare these ratios to those of Combination F1. What has happened? F2 has productivity for materials and productivity for labor.

3. Compute the cost of producing 22,000 units of output using Combination F1. $fill in the blank 11

Compare this cost to the cost using Combination F2.

Cost of Combination F1	$fill in the blank 12
Cost of Combination F2	fill in the blank 13
Difference	$fill in the blank 14

Does moving from Combination F1 to Combination F2 represent a productivity improvement?