Bob Richards, the production manager of Zychol Chemicals, in Houston, Texas, is preparing
his quarterly report which is to include a productivity analysis for his department. One of the
inputs is production data prepared by Sharon Walford, his operations analyst. The report,
which she gave him this morning, showed the following:
2000 2001
Production (units) 4,500 6,000
Raw Material Used (barrels of petroleum byproducts)
700 900
Labor Hours 22,000 28,000
Capital Cost Applied To The Department ($) 375,000 620,000
Bob knew that his labor cost per hour had increased from an average of $13.00 per hour to an
average of $14.00 per hour, primarily due to a move by management to become more
competitive with a new company that had just opened a plant in the area. He also knew that
his average cost per barrel of raw material had increased from $320 and $360. He had concern
about the accounting procedures that increased his capital cost from $375,000 and $620,000,
but earlier discussions with his boss suggested that there was nothing that could be done about
that allocation.
Bob wondered if his productivity had increased at all. He called Sharon into the office and
conveyed the above information to her and asked her to proceed with preparing this part of
the report.
1. Prepare the productivity part of the report for Mr. Richards. He probably expects some
analysis of productivity inputs for all factors, as well as a multifactor analysis for both years
with the change in productivity (up or down) and the amount noted.
2. The producer price index had increased from 120 to 125 and this fact seemed to indicate to
Mr.Richards that his costs are too high. What do you tell him are the implications of this
change in the producer price index?
3. Management’s expectation for departments such as Mr. Richards’ is an annual productivity
increase of 5%. Did he reach this goal?

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What it means: Published by the Bureau of Labor Statistics, the Producer Price Index measures the change in prices received by the original producer at the wholesale level.
How it’s used: The Producer Price Index (PPI) measures inflation at the wholesale level, which is an indicator of price pressures faced by businesses and often indicates the price pressures that may soon be faced by consumers.
Read more:
http://www.bankrate.com/rates/economic-indicators/ppi-producer-price-index.aspxProducer Price Index