The battery division of Chalmur Company has recently engaged in a vigorous effort to increase productivity. Over the past several years, competition has become very intense, and the divisional manager knew that a significant price decrease for its batteries was in order. Otherwise, the division would lose at least 50 percent of its market share.

To maintain its market share, Chalmur had to decrease its per-unit price by $2.50 by the end of 1995. Decreasing the price by $2,50, however, absolutely required a similar increase in cost efficiency. If divisional profits dropped by $2.50 per unit, the continued existence of the division would be in question. To assess the outcome of the productivity improvement program the following data were gathered:

 

REQUIRED:

1. Calculate the partial productivity ratios for each year. Can you say that productivity has improved? Explain.

2. Calculate the profit change attributable to productivity changes.

3. Calculate the cost per unit for 1994 and 1995. Was the division able to decrease its per-unit cost by at least $2.50? Comment on the relationship of competitive advantage and productive efficiency.

Output Input quantities: Materials Labor Capital Energy Input prices: Materials Labor Capital Energy 1994 400,000 100,000 400,000 $4,000,000 100,000 $2.00 8.00 0.15 2.00 1995 500,000 100,000 200,000 $10,000,000 300,000 $ 3.00 10.00 0.10 2.00