8. There will NOT be any presentations for this case. PRBLEM DESCRIPTION: A loca

Question

8. There will NOT be any presentations for this case. PRBLEM DESCRIPTION: A local soft drinks manufacturing company operates a plant in the northern part of the country. The plant produces soft drinks in three types of packages that include returnable glass bottles, aluminum cans, and nonreturnable plastic bottles. In response to the continued growth in demand, the company wants to build another plant. The anticipated demand for the soft drinks' three types of packages (expressed in cases) over the next 3 years is shown in Table 1 below. Also, the planned production capacities for the existing plant extrapolated over the same 3-year horizon are given in Table 2 below. Table 1. Demand for the three types of packages over the next 3 years Year Package Returnables Cans Nonreturnables 2400 1750 490 2450 2000 550 2600 2300 600

Explanation / Answer

a. Estimate the average cost per unit for each plant.
Plant A: $0.12
Plant B: $0.0725
Plant C: $0.055
b. Why would the manager of Plant A be unhappy with using the average cost as the performance measure?
Manager of Plant A will be unhappy with using average cost as performance measure, because he has no control over FIXED COST. The variable cost of is lowest in case of Plant A, as details given below:
Variable Cost
Plant A: $0.02
Plant B: $0.0225
Plant C: $0.0217

c. What is an alternative performance measure that would make the manager of plant A happier?
The alternative performance indicator should be variable cost, which is lowest in case of Plant A
Variable Cost
Plant A: $0.02
Plant B: $0.0225
Plant C: $0.0217

d. Under what circumstances might the average cost be a better performance measure?
Average cost be a better performance indicator, when evaluating the total cost and sales ratios, and a decision is required to continue a plan

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