Question

Barney's Boston Bagel Bun Bakery is looking into a new type of bag tie (Tie N) that will better seal, and more importantly, better reseal the company's bagels after they have been taken home. The process that it is using at this time without the new bag tie is referred to as Current and uses Tie C. According to a competitive analysis of Barney's bagels compared to those of the competition, the new bag ties (Tie N) would dramatically increase the shelf life of the bagels. Barney currently sells all the bagels the company can make which is 5,000 bags of bagels a week. The new tie, Tie N, would cost $0.02 more than the old one but the longer shelf life would create incremental value to the customer.

1. In addition to the cost of the new ties (Tie N) assume that the new tie would require a machine that would add $200 per week to the companys fixed costs. How much more should Barney's charge per bag in order to make the same profit as it made using the Current process and Tie C?

2. Instead of the modification in #1, Barney's is considering adding a faster machine along with a second baker. For this modification, a new tie Tie R costing $0.03 more than Tie C is required. In addition to the additional cost of this tie Tie R, this would add $1,500 per week to the company's fixed costs but would triple the company's output. How much should the company add to the price of the bag of bagels if it wants to increase profit by at least $3,000 per week compared to the Current operation using Tie C?

3. Barney has decided to add $0.40 to the price of a bag of bagels and wants to make $3,000 more per week compared to the Current operation using Tie C. He will be adding the faster machine, the new tie Tie N and the second baker explained #2 above. How many bags of bagels will he need to produce to make $3,000 more per week compared to the Current operation using Tie C?

Answer 1

1.

Increase in costs per Tie = $0.02

Increase in fixed cost per week = $200

No. of bags sold in a week = 5000

Fixed cost per bag sold = 200 / 5000 = $0.04 per bag

Total Cost increased per bag = $0.02 + $0.04 = $0.06

To maintain the same profit, Barney should charge $0.06 more per bag.

2.

Tie C output = 5000 bag

Tie R output is three time of output from Tie C

Tie R output = 5000 * 3 = 15000 bags per week

Using Tie R will increase variable cost by $0.03 per bag

Increase in Fixed cost = $1500 per week

Fixed cost increase per bag = 1500 / 15000 = $0.10 per bag

Total Increase in cost = $0.03 + $0.10 = $0.13

For 15000 bags, 15000 * 0.13 = $1,950

It is given that the profit has to be increased by $3000.

Therefore, the selling price must be increased by (3000 + 1950) / 15000 per bag.

Increase in Selling price per bag = $0.33

3.

Incremental cost per bag from Tie N =$0.06

Incremental cost per bag from the second Baker = $1950 / 15000 = $0.13.

Total Incremental cost per bag = $0.06 + $0.13 = $0.19 per bag

Additional Profit = Incremental revenue – Incremental Costs per bag

3000 = $0.40 * No. of output – 0.19* output

3000 = $0.21 * no. of output

No. of output = 3000 / 0.21 = 14,286 bags