Mitchell Beverage Company

Mitchell Beverage Company produces Cactus Juice, a popular alcoholic beverage.

Recently the firm has been experienced problems of product pilferage at the warehouse.

In one month, 3200 bottles of Cactus juice, representing 0.4 percent of the month's

volume, could not be located for shipping. Should the problem go unresolved, it is

anticipated that it will continue at this rate. The forecast annual sales volume for Cactus

Juice is 9.6 million bottles. Each bottle sells for $4.50.

Steve Davis, vice president of distribution, has asked you to look into the following

security options to reduce the pilferage problem.

a. Hire four security guards to patrol the warehouse floor all hours of the day, 7 days

a week. The firm would offer a wage of $14.50/hour to the guards as well as a

benefits package expected to be worth $2,000 per employee per year. The

presence of security guards should lower pilferage to 0.2 percent of volume. Only

one guard would be on duty at any time.

b. Implement an electronic detection system based on bar code technology. This

would require purchasing bar code equipment for the packaging facility and

warehouse. Electronic scanning devices must also be purchased and placed at

warehouse entrance. The electronic detection package, including bar code printers

and readers, will cost $120,000. In addition, employees at the plant and

warehouse will be trained to use the new equipment use at a one-time cost of

$8,000. Monthly maintenance of the system is expected to cost $800. Also, a bar

code specialist must be hired. The specialist would earn salary of $49,000 per

year. Product pilferage is expected to be lowered to 0.1 percent of volume with

the electronic security system. The system has an estimated life of 8 years. Accrue

all costs evenly over the life of the equipment.

c. Install security cameras in key locations throughout the warehouse. It has been

determined that six cameras could adequately record warehouse operations. Each

camera cost $1,200. The support devices installation will cost $36,000. Four

security guards will be hired for the purpose of viewing the security for the

purpose of viewing the security monitors for suspicious activity. One guard would

be on duty at all times. The guards each earns $12/hour, in a 42-hour workweek,

and receives a benefit package worth $1,000 per year. Pilferage under this system

would be 0.05 percent of volume. The monitoring equipment is expected to have

a life of 12 years. Accrue all fixed costs evenly over life of the equipment.

Case Questions:

(a) Compare the costs and benefits of each option. (15 marks)

(b) Should the firm implement any of the option above, or make no investment and

allow the pilferage to continue at the rate of 0.4% of volume? (5 marks)