Operation Management (MBA 632)

1. A company that makes shopping carts for supermarkets and other stores recently purchased
some new equipment that reduces the labor content of the jobs needed to produce the
shopping carts. Prior to buying the new equipment, the company used five workers, who
produced an average of 80 carts per hour. Labor cost was $10 per hour and machine cost
was $40 per hour. With the new equipment, it was possible to transfer one of the workers to
another department, and equipment cost increased by $ 10 per hour while output increased
by four carts per hour. Find
a) Compute labor productivity under each system. Use carts per worker per hour as the measure
of labor productivity.
b) Compute the multifactor productivity under each system. Use carts per dollar cost (labor plus
equipment) as the measure.
c) Comment on the changes in productivity according to the two measures, and on which one
you believe is the more pertinent for this situation.

Before (Old system) After (New system)

Output 80 carts/hr 84 carts/hr
Labor input 5 workers 4 workers
Labor cost $10/hr $10/hr
Machine cost $40/hr $50/hr

a) Labor Productivity:

Labor Productivity = output/number of workers

Before (Old system) After (New system)

80 carts/ 5 workers= 16 Carts per hour. 84 carts/4 workers= 21 Carts per hour

 There is increase in labor productivity.

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 Operation Management (MBA 632)

b) Multifactor Productivity:

Multi-factor productivity = output / (labor cost+ machine cost)

Before (Old system)

= 0.889 carts per cost in dollar

After (New system)

=0.933 carts per cost in dollar

21−16
c) Labor productivity measure ¿ × 100 %
16
¿ 31.25 %
0.933−0.889
Multifactor productivity measure ¿ ×100 %
0.889
¿ 4.94 %
Change in labor productivity may not be advisable. 
2. Adama Garment which is operating in Adama currently has opened four new stores in
Ethiopia. Data on monthly sales volume and labor hours are given below for each town.
Which store location has the highest labor productivity?

Stores Bale-Robe Hawassa Nekemte Bahirdar

Sales Volume 12,000 birr 60,000 birr 40, 000birr 25,000 birr

Labor Hours 60 500 250 200

Solution;
Labor Productivity:
12,000birr
i) Bale-Robe: =¿ 200 birr per worker.
60 worker

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 Operation Management (MBA 632)
60,000 birr
ii) Hawassa: - =¿ 120 birr per worker.
500 worker
40 , 000 birr
iii) Nekemte: - =¿ 160 birr per worker.
250 worker
25,000 birr
iv) Bahirdar: - =¿ 125 birr per worker.
200 worker
Bale Robe has the highest labor productivity.

3. Adama Garment accountant (from Problem 2) suggests that monthly rent and hourly wage
rate also be factored into the productivity calculations. Hawassa pays the highest average
wage at birr 6.75 an hour. Bale-Robe pays birr 6.50 an hour, Nekemte birr 6, and Bahirdar
birr 5.50. The cost to rent store space is birr 2000 a month in Hawassa, birr 800 a month in
Nekemte, birr 1200 a month in Bale-Robe, and birr 1500 a month in Bahirdar.
a) Which store is most productive?
b) Adama garment general manager is not sure it can keep all four stores open. Based on
multifactor productivity, which store would you close? What other factors should be
considered?

Given;
Stores Bale-Robe Hawassa Nekemte Bahirdar

Sales Volume 12,000 birr 60,000 birr 40, 000birr 25,000 birr

Labor Hours 60 500 250 200

Average wages per hour 6.50 6.75 6.00 5.50

Store rent monthly 1,200 2,000 800 1,500

Solution
a) Multifactor Productivity:
12,000 birr
i) Bale-Robe: - ¿
( 60 worker × 6.50 cost per hour +1,200 cost per month )
12,000 birr
=
( 60 worker ×6.50 cost per hour +1.67 cost per hour )
¿ 30.64 birr cost per hour

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 Operation Management (MBA 632)
60,000 birr
ii) Hawassa: - ¿
(500 worker × 6.75 cost per hour +2,000 cost per month )
60,000 birr
=
( 500 worker × 6.75 cost per hour +2.78 cost per hour )

¿ 17.76 birr cost per hour

40,000 birr
iii) Nekemte: - ¿
( 250 worker × 6.00 cost per hour +800 cost per month )
40,000 birr
=
( 250 worker × 6.00 cost per hour +1.67 cost per hour )
¿ 26.65 birr cost per hour
25,000 birr
iv) Bahirdar: - ¿
( 200 worker × 5.50 cost per hour +1,500 cost per month )
25,000 birr
=
( 200 worker × 5.50 cost per hour +2.08 cost per hour )

¿ 22.68 birr cost per hour

Bale Robe store is the most productive.

b) Hawassa store will have to close among other stores. Combinations of inputs can include
energy, land, quality, technology, management, and purchased services.
4. Take a case of one company or the company in which you are working, and then:
i) Identify the outputs and inputs of the company
ii) Estimate yearly outputs and inputs identified either in value or volume
iii) Calculate single, multiple, and total factor productivity

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Operation Management (MBA 632)