If a company invests in production improvement option that will boost labor productivity by 50%, while its annual depreciation costs will rise by an amount equal to 10% of the investment costs associated with installing option D, it is accurate to say that its labor costs per pair produced will decline
The Correct Answer and Explanation is:
Correct Answer:
True – the labor costs per pair produced will decline.
Explanation (300+ words):
When a company invests in a production improvement that boosts labor productivity by 50%, it means that each worker can now produce 50% more output than before within the same timeframe. Labor productivity refers to the amount of output (in this case, shoes or pairs) produced per unit of labor input (such as per hour worked). When productivity increases, fewer labor hours are needed to produce the same number of units, or the same labor hours can produce more units.
Let’s break this down with a simple example:
- Suppose initially a worker could produce 10 pairs of shoes per hour.
- A 50% increase in productivity means that now the worker can produce 15 pairs of shoes per hour.
This increased output per hour lowers the labor cost per pair, because the same wage is spread over more units.
Labor Cost Decline:
If a worker is paid $15 per hour, then:
- Before the productivity improvement:
Labor cost per pair = $15 / 10 pairs = $1.50 per pair - After the 50% productivity improvement:
Labor cost per pair = $15 / 15 pairs = $1.00 per pair
So, the labor cost per pair decreases by 33.3%, which is a significant cost saving.
What About Depreciation Costs?
The question mentions an increase in annual depreciation costs equal to 10% of the investment costs due to the installation of production option D. While this will increase fixed costs, it does not affect labor costs per pair directly. Labor cost per pair is specifically about how much labor expense is tied to producing one unit. Depreciation is a non-cash, fixed overhead cost and does not alter the variable cost of labor per unit.
Therefore, it is accurate to say that labor costs per pair produced will decline when labor productivity increases by 50%, regardless of the rise in depreciation costs.