For both suppliers, it is expected that the average yield of oil from olives is 40% Because the oleic acid and linoleic content varies across the suppliers, so does the price. It is expected that the cost of supply from the suppliers will be a percentage of the market average price of olives. Supplier B Cost as % of Average Market Price of raw olives 94% 90% The company faces an additional variable production cost of $11/short ton and an estimated fixed cost of $1,790,000 over the upcoming production period The company is asking you to provide a recommendation on the amount of raw material it should purchase from each supplier to minimize its cost of feedstock Management is also looking for an analysis on the profitability of the company in the next production cycle Suggested Approach This is a fairly complex problem. The following approach is suggested Use the historical price data set as input to a time series forecast model in order to generate forecasted prices for the average price of olives, oil, and mash in the next production period. Use standard measures of error to decide between a three-period moving average model or an exponential smoothing model (with a=0.2). Use the type of model for all three time series forecasts. That is, if you decide to use the moving average model, use a three-period moving average model to fit the relevant data for all three series. Don't use the moving average for one time series and the exponential smoothing model for another time series. Fomulate a linear program to minimize the cost of raw olives. Use the average price of olives forecasted from the previous step in order to determine supplier prices Perform a cost-volume-price analysis (review the handout entitled Cost-Volume-Profit Analysis for details) using the average cost per short ton average selling price per short ton. You can generate an effective cost per short ton by dividing the total cost of supply (from the linear program) by the total volume that you assumed in the linear program). You can generate an effective selling priceper short ton from the expected percentage yields and the forecasted everage price of olive oil and math Because of the way that the contract is written, you can assume that the purchase of a olives in a variable cost Gou only purchase what you require) . o Recall that the cost-volume-price analysis requires you to provide en algebraictatement of the retenue function and the cost function For both suppliers, it is expected that the average yield of oil from olives is 40% Because the oleic acid and linoleic content varies across the suppliers, so does the price. It is expected that the cost of supply from the suppliers will be a percentage of the market average price of olives. Supplier B Cost as % of Average Market Price of raw olives 94% 90% The company faces an additional variable production cost of $11/short ton and an estimated fixed cost of $1,790,000 over the upcoming production period The company is asking you to provide a recommendation on the amount of raw material it should purchase from each supplier to minimize its cost of feedstock Management is also looking for an analysis on the profitability of the company in the next production cycle Suggested Approach This is a fairly complex problem. The following approach is suggested Use the historical price data set as input to a time series forecast model in order to generate forecasted prices for the average price of olives, oil, and mash in the next production period. Use standard measures of error to decide between a three-period moving average model or an exponential smoothing model (with a=0.2). Use the type of model for all three time series forecasts. That is, if you decide to use the moving average model, use a three-period moving average model to fit the relevant data for all three series. Don't use the moving average for one time series and the exponential smoothing model for another time series. Fomulate a linear program to minimize the cost of raw olives. Use the average price of olives forecasted from the previous step in order to determine supplier prices Perform a cost-volume-price analysis (review the handout entitled Cost-Volume-Profit Analysis for details) using the average cost per short ton average selling price per short ton. You can generate an effective cost per short ton by dividing the total cost of supply (from the linear program) by the total volume that you assumed in the linear program). You can generate an effective selling priceper short ton from the expected percentage yields and the forecasted everage price of olive oil and math Because of the way that the contract is written, you can assume that the purchase of a olives in a variable cost Gou only purchase what you require) . o Recall that the cost-volume-price analysis requires you to provide en algebraictatement of the retenue function and the cost function
