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# Calculating the productivity ratios in the given case

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The Morning Brew Coffee Shop sells Regular, Cappuccino, and Vienna blends of coffee. The shop's current daily labor cost is \$320, the equipment cost is \$125, and the overhead cost is \$225. Daily demands, along with selling price and material costs per beverage, are given below.

Regular Coffee Cappuccino Vienna Coffee
Beverages sold 350 100 150
Price per beverage \$2.00 \$3.00 \$4.00
Material (\$) \$0.50 \$0.75 \$1.25

Harald Luckerbauer, the manager at Morning Brew Coffee Shop, would like to understand how adding Eiskaffee (a German coffee beverage of chilled coffee, milk, sweetener, and vanilla ice cream) will alter the shop's productivity. His market research shows that Eiskaffee will bring in new customers and not cannibalize current demand. Assuming that the new equipment is purchased before Eiskaffee is added to the menu, Harald has developed new average daily demand and cost projections. The new equipment cost is \$200, and the overhead cost is \$350. Modified daily demands, as well as selling price and material costs per beverage for the new product line, are given below.

Regular Coffee Cappuccino Vienna Coffee Eiskaffee
Beverages sold 350 100 150 75
Price per beverage \$2.00 \$3.00 \$4.00 \$5.00
Material (\$) \$0.50 \$0.75 \$1.25 \$1.50

a. Calculate the change in labor and multifactor productivity if Eiskaffee is added to the menu.
b. If everything else remains unchanged, how many units of Eiskaffee would have to be sold to ensure that the multifactor productivity increases from its current level?

#### Solution Preview

Please refer attached file for better clarity of tables in MS Excel.

a. Calculate the change in labor and multifactor productivity if Eiskaffee is added to the menu.

Case 1- Without Eiskaffee

Regular Coffee Cappuccino Vienna Coffee Total
Beverages Sold, Q 350 100 150
Price per beverage, P 2 3 4
Material (\$), M 0.50 0.75 1.25
Total Revenue, P*Q 700 300 600 1600
Material Cost, M*Q 175.00 75.00 187.50 ...

#### Solution Summary

Productivity ratios help us to analyze the relationship between input and output costs. Solution to the given problem describes the steps to calculate labor and mutifactor productivity ratios with and without a new product called Eiskaffee. It also calculates the number of units of Eiskaffee that should be sold to ensure an increase in multifactor productivity ratio.

\$2.19