Konway Kola problem

We are a start-up business competing in the carbonated cola market. Our market includes the states of AR, TX, LA, TN, MO, MS, and OK. Target customers are food wholesalers, food service companies, vending and retailers.

 

Our products are sold in two (2) serving sizes: 12-ounce aluminum cans and 20-ounce plastic bottles. Both stock keeping units (SKUs) are sold to customers in cases of 24 units. We produce only one flavor, "Konway Kola". No diet products are produced. We pay delivery charges to our customers.

 

• We employ 18 workers; 12 hourly and 6 salaried.
• Average hourly pay = $10.80. Annual salaries average $34,500 per person.
• Our business operations plan is based upon 240 days per year.
• Each production shift is scheduled to operate 8 hours.

 

Annual Sales Forecast:

 

·         12-oz. cans = 960,000 cases of 24

 

·         20-oz. bottles = 576,000 cases of 24

 

Operating Budget:

         

• Buildings = $1,200,000 purchase, ten (10) year depreciation
• Equipment = $600,000 purchase, five (5) year depreciation
• Maintenance = $60,000 per year

 

• Energy = $2,000 per shift
• Benefits = 40% of total wages and salaries combined
• Marketing = $40,000 per year

 

• Administration & General = $300,000 per year
• Ingredient cost per case = $.72/12 oz.; $1.20/20 oz.
• Packaging cost per case = $.72/12 oz.; $1.10/20 oz.

 

• Warehousing = $180,000 per year
• Delivery Charges = $0.325 per case of 12 ounce cans; $0.490 per case of 20 ounce bottles

 

 

 

Production Schedule:

 

·         12 ounce = 8,000 cases per shift

                     

• 20 ounce = 4,800 cases per shift

 

Overhead includes: Building and equipment depreciation, employee benefits, marketing, administration & general, maintenance, energy, and warehousing (delivery cost is not included)

 

Production mix: We plan to pack only one (1) of the two (2) SKUs (either 12 ounce cans or 20 ounce bottles) per 8 hour shift. A total of 240 shifts are required to produce the annual requirements for both sizes combined.

 

Questions for you to answer:

 

1. How many shifts are required to produce the annual sales forecast for each SKU; 12 ounce and 20 ounce?

 

2. What is the total cost per case for each SKU? Break down costs into ingredients, packaging, overhead and labor. Work your answers out to three (3) places to the right of the decimal point.

 

3. What must the KKK selling price be per case (including delivery charges) for each of the SKUs in order to yield a 25% gross margin on sales dollars? Round up to next whole penny per case.

 

4. Assuming a 22% profit margin on the retailer's selling prices, what will be the shelf price for one 12 ounce can and for one 20 ounce bottle? Round up to next whole penny per can or bottle.

 

5. How might we increase our production capacity?

 

6. How might we reduce our costs?

 

7. Do the retail prices per unit look attractive to you?