Aunt Nicole's Cookies, Inc., prepares frozen gourmet cookies for shipment to upscale grocery stores as well as mailing to web and catalog customers. The company has two workstations, cooking and distribution. The cooking station is limited by the cooking time of the food. Distribution is limited by the speed of the workers. Distribution normally waits on food from cooking. Because the demand has increased in recent months to 4,000 dozen cookies, management is considering adding another oven in the cooking station or else having the cooks start to work earlier. The monthly cost of operating the cooking station one more hour each day is $1,500. The cost of adding another cooking station would add an average of $8 per hour. The current operating hours total eight hours a day, 24 days a month. The contribution margin of the finished products is currently $2 per dozen. Inventory carrying costs average $0.50 per dozen per month. Either the extra hour or the new cooking station would increase production by 50 dozen a day, with a long-run increase of 100 dozen units in finished goods inventory to 500 dozen.
a. What is the total production per month if the change is made?
b. What is the increase in the expected monthly product contribution for each of the possible changes? Assume long-run production equals sales.
c. What course of action would you recommend?
I did an analysis in Excel (attached) that works the numbers. What you see from this is that the CM goes up with each additional hour and that the benefit of adding an oven is not a great economical savings. Here's what I did:
First, for every extra hour, you can make 50 dozen/8 more cookies x $2 (see column C). That will cost you $8.00. See? Do ...
This solution evaluates two alternatives, giving the incremental costs and revenues and discussing the pros and cons of both. The discussion includes quantitative and qualitative issues.