Production Decisions Under Bottleneck Operations Health Kick Cereal Company manufactures breakfast cereals. In response to consumer demand, the company wants to begin producing gluten-free cereals. In order to do this the company will have to separate the production of gluten-free cereals from other cereals. As part of the production process, finished cereal must be loaded into the appropriate sized bags utilizing a packaging machine. With the cost of packaging machines at an all time high, and in light of the fact that the machine used for packagin gluten-free cereal cannot be used for any other product, the company is only willing to commit one packaging machine to be used in the gluten-free cereals. Based upon current union negotiation, the company is only allowed to run each packaging machine for a total of 12 hours daily - this provides a total of 43,200 seconds of processing time daily. The total daily fixed cost of the gluten-free cereal production is $ 3,000 . Marketing research indicates customers demanding gluten-free cereal will purchase boxes in the following sizes: a 10 ounce box; a 20 ounce box; and a 40 ounce box. Research also indicates that the company can sell as many boxes as it can manufacture in a day. Since the marketing information did not indicate whether customers prefer more of one bag size over another, the company plans to maximize production time of the dedicated packaging machine, utilizing all available 43,200 machine seconds each day, which will create a bottleneck in the packaging process. Using the information above and the additonal data below, complete assignments number 1 - 5 below. Additional Data: 10oz bag 20oz bag 40oz bag Unit selling price $ 6 $10 $18 Unit variable cost $ 4 $ 7 $ 13 Unit contribution margin $ 2 $ 3 $ 5 Packaging machine seconds per bag 5 5 10

Since the unit contribution margin per bag produced is highest for the 40 oz bag, the company plans to go with the following level of daily production: Budgeted daily production of bags 200 400 4,020

1 What is the total daily net income the company will earn on gluten-free cereal if they manufacture the planned quantity of bags per day for each size?

2 Calculate the unit contribution margin per production bottleneck operating second for each bag.

3 Based upon your calculation above, which size bag should the company focus on producing?

4 Keeping in mind the fact that the packaging machine is limited to running a total of 43,200 machine seconds per day, calculate the amount of daily net income the company would earn in each instance if it decided to produce only 1 size bag of gluten-free cereal:

5 If the stores that are willing to sell the company's gluten-free cereal insist that all 3 sizes must be stocked to include a daily minimum of at least 500 bags in each size: a. What is the optimal number of bags for each of the 3 sizes to produce daily? b. What is the amount of daily net income the optimal production mix you chose above will provide? c. Would the total daily net income increase or decrease if the company decided, instead, to make: 500 - 10 oz bags 1,000 - 40 oz bags Which would limit the number of 20 oz bags that could be produced to :