A Framework for Profitability and Productivity Measures

Performance of an enterprise is often measured as a ratio of output to input. It is possible to define a variety of ratios, depending on whether measurements of variables are made in physical or financial terms and depending on which resource inputs are selected for performance evaluation. In addition, ratios may relate current outputs to current inputs, or current outputs to the maximum possible outputs for a given set of inputs, or current inputs to the minimum possible inputs for a given level of output, thereby giving rise to definitions of four production efficiencies. Also, several productivity ratios may be defined, and the network of relationships between them demonstrates how one productivity ratio can improve at the expense of another. The effect of productivity ratios on unit cost can then be explored and the effect of input factor prices (such as wage rates) ascertained.