Question

Each? morning, Ned Preston stocks the drink case at Ned?'s Beach Hut in Daytona Beach comma Florida. Ned?'s Beach Hut has 95 linear feet of refrigerated display space for cold drinks. Each linear foot can hold either five ?12-ounce cans or four ?20-ounce plastic or glass bottles.

The beverage stand sells three types of cold? drinks:

Cola minus Cola in? 12-oz. cans for $ 1.45 per can

Organic minus Ade in? 20-oz. plastic bottles for $ 1.65 per bottle

Tobe minus Cola in? 20-oz. glass bottles for $ 2.10 per bottle

Ned?'s Beach Hut pays its suppliers the? following:

$ 0.10 per? 12-oz. can of cola - cola

$ 0.35 per? 20-oz. bottle of organic - ade

$ 0.70 per? 20-oz. bottle of tobe - cola

Ned?'s Beach? Hut's monthly fixed expenses include the? following:

                Hut Rental $355

                Refrigerator Rental          70

                Ned’s Salary 1,800

                Total fixed expenses       $2,225

Requirements:

1. What is the constraining factor at Ned?'s Beach? Hut? What should Ned stock to maximize? profits? What is the maximum contribution margin he could generate from refrigerated drinks each? day?

2. To provide variety to? customers, suppose Ned refuses to devote more than 60 linear feet and no less than 5 linear feet to any individual product. Under this? condition, how many linear feet of each drink should be? stocked? How many units of each product will be available for sale each? day?

3. Assuming the product mix calculated in Requirement? 2, what contribution margin will be generated from refrigerated drinks each? day?

Answer 1

Requirement 1

The constraining factor at Ned's Beach Hut is linear feet of shelf space. Nick should hold the drink with the maximum contribution margin Per linear foot of shelf space.

Nick's Beach Hut

Product mix analysis

	Cola - Cola 12-oz. cans	Organic - Ade 20-oz. plastic bottles	Tobe - Cola 20-oz. glass bottles
Sale price per unit	1.45	1.65	2.10
Variable cost per unit	0.10	0.35	0.70
Contribution margin Per unit	1.35	1.30	1.40
Units of linear foot of shelf space	5	4	4
Contribution margin per linear foot of shelf space	6.75	5.20	5.60

Cola-Cola 12-oz. cans has the highest contribution margin per linear foot of shelf space. To maximize profits, Nick’s should devote all its shelf space to Cola-Cola 12-oz. cans.

Contribution margin per linear foot of shelf space (Cola-Cola) $6.75

Linear feet of shelf space available 95

Total Contribution margin (6.75*95) $ 641.25

Requirement 2

If Nick’s cannot devote more than 60 linear feet to any individual product, then Nick’s should stock its shelves as follows:

- 60 linear feet with product having the highest CM: 12-oz. cans of Cola-Cola

- 5 linear feet with product having the lowest CM: 20-oz. Plastic bottles of organic-Ade

- Remaining 30 (95-60-5) linear feet with product having the middle CM: 20-oz. Glass bottles of Tode-Cola.

The following quantities of each product will be available for sale each day:

	Units of sale
12-oz. can of cola - cola	300 (60*5)
20-oz. bottle of organic - ade	20 (5*4)
20-oz. bottle of tobe - cola	120 (30*4)

Requirement 4

	Cola-Cola	organic-ade	tode-cola
Contribution margin Per linear foot	6.75	5.20	5.60
× linear feet	60	5	30
Contribution margin	405	26	168

Total contribution margin =405+26+168 = 599