Should you invest to increase productivity?


Formulation of the problem

Investments in productivity usually imply an increase in discretionary fixed costs (e.g. employee training) or capacity fixed costs (e.g. rent of a more expensive and more efficient piece of equipment) to reduce unit variable costs. The alternatives are the status quo versus making the investment (train or rent a different piece of equipment). Here, the decision problem is relatively simple: does the reduction in unit variable cost result in savings justifying the additional fixed costs?


Classification based on relevance

The only relevant costs are the additional fixed costs (training expense, increase in rent) and the avoided variable costs because of the reduction in net variable costs. Note that while the additional fixed costs are independent from the volume, the amount of avoided variable costs is proportional to the volume.


Net Economic Impact and indifference points

For this exercise, you can download here data and solutions if you did not already. Try to compute the net economic impact and the indifference point in volume \(Q\), unit variable cost change \(\Delta V_c\) and fixed cost change \(\Delta FC\) assuming that you invest 200 in training your employees to save 0.1 euros on every unit produced (3,500 cocktails). These impacts are summarized in the following equation:

\[ \begin{aligned} NEI = - Q \times \Delta V_c - \Delta FC \end{aligned} \]



Qualitative factors

First, such a decision changes the cost structure and more specifically increases the relative proportion of fixed costs for a given volume. Therefore, it increases the degree of operating leverage.

Second, such investments in productivity often result in a lower demand for unqualified workers who may be dismissed with little alternative job opportunities. Investing in their training to redeploy them or at least increase their employability is then socially responsible. However, if greater efficiency is obtained through lower waste (less defects, greater yield of the raw materials), it can also be considered as better for the planet.


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