Question

3) BADM Variety Inc. runs a small convenience store. It has one refrigerator in which it stocks 355 ml cans of soft drinks and 500 ml cartons of orange juice. The beverages are kept on separate shelves. There are five shelves in the refrigerator. The owner only has time to stock the refrigerator once a day. The following is the additional information BADM Variety Inc. has provided:
Soft Drinks|Orange Juice Selling price per unit $1.75|$3.99 Cost to BADM Variety Inc. per unit 0.50 |1.99 Units per shelf 130|90 Daily demand in units 600|500 How many shelves should be allocated for each product?

How much operating income would the company lose if it must stock at least two shelves of each beverage?

Answer 1

Since number of shelves is a constraint resource ,we will calculate contribution per shelves and ranking will be made based on highest contribution per shelves

	Soft drink	Orange juice
price	1.75	3.99
less:variable cost per unit	-50	-1.99
contribution per units	1.25	2
number of units in a shelves	130	90
contribution per shelf	1.25*130=162.5	2*90=180
Ranking based on highest contribution per shelf	2	1

Allocation of shelves to products

	Number of units stored in a shelf	Shelf available	Total units that is stored	Shelf allocated
Orange Juice	90	5	90*5=450 units   (not all of 500 units demand can be met)	5
soft drink	130	0	0	0

Contribution if optimal allocation made :[450*2]+ [0*1.25]soft drinks

                                         = 900+0

                                         = $ 900

b)If atleast 2 shelves is to be allocated to each product then using optimal strategy we will allocate 2 shelves to soft drinks and 3 shelves to orange juice out of 5 shelves

	Shelves allocated	total units stored in shelf	contribution per unit	Total contribution
Soft drinks	2	2*130=260	1.25	260*1.25=325
Orange Juice	3	3*90=270	2	270*2=540
Total contribution				865

Amount of operating income lost due to this strategy = 865 - 900 = -35   ($ 35 lost )