Analyzing Costs and Probabilities for Profitable Target Fill Amounts

I will Indicate what Information I found Important in making the best economic decision for the target fill amount. There were several costs that we need to consider when analyzing what will return the most profit. I will walk you through the data I used, the analytical method performed, and my recommendation on what I believe would be the most profitable for Lore Pharmaceuticals. Determining the Proportion of Properly Filled Bottles I started by determining a list of target fill rates to test for your company.

There Is a standard normal distribution function that can be used to determine the probability for different fill rates. I used the required fill rate of 10 ounces as a basis of lactating the proportion filled properly for that ounce level. The results only showed a 50% probability as you can see in exhibit A, in the first column. I increased the fill rate by . 1 ounces and continued to calculate the probability using the same standard normal function. These results, shown in exhibit A, can be used to help calculate the highest possible contribution per case by considering the impact on revenue and variable costs.

The results show, with every . 1 ounce increase to the target fill rate, the probability that the bottles with meet the proper fill requirement of 10 ounces goes up. Expected Revenue per Case Now that the probability of properly filled bottles has been calculated, we can determine our expected amount of revenue per case. We know that a case that Is properly filled will sell for $1 86 and a case that has been reworked will sell for 80% of fill rate of jazz. Is $167. 40.

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We arrive at this number by assuming 50% of the cases will be sold at $186 and 50% will be sold at 80% of $186, or $148. 80. You can see on Exhibit A, that as the probability of properly filled bottles increases, revenue also increases. This is because the higher probability that the cases will meet the 10 ounce requirement, the more cases you will be able to sell at full price. Cost of Active Ingredients per Case When trying to maximize profit, it is important to consider what costs are going to impact the bottom line.

Specifically, we will want to evaluate the variable costs that change related to the target fill line. I started with the data the company provided in the projected operating profit and I calculated what the cost per case of active ingredients per ounce would be. I included the active ingredients and the blending direct labor because these amounts correlate with how many ounces are in each total. The filling materials, filling direct labor, and filling overhead are important costs that will affect the bottom line; however they are not dependent on the target fill rate.

By calculating a per ounce amount, we can calculate the active ingredient cost per case. As you can see in Exhibit A, the higher the target rate per bottle, the higher the cost per case. This is because the more ounces used to fill the bottles; the more ingredients are going to be used. Cost of Rework per Case Another cost to consider is the cost of rework per case. Unless every bottle meets the ill requirement of 10 ounces, there is going to be a rework cost. Given the hourly wage and rate at which a case can be reworked, we can calculate a per case rework amount.

The higher probability that the bottles are properly filled implies a lower cost of rework. You can see in exhibit A, the cost of rework decreases as the target fill rate increases. Recommendation/Conclusion Based on the calculations, I would recommend that Lore Pharmaceuticals set a target rate of 10. 4 for the current production line of Linton. As you can see in Exhibit A, the highest contribution per case is at the 10. 4 rate. When we increase the target fill rate to 10. 5, the contribution per case decreases. Even though at a target rate of 10. Returns the highest projected revenue per case, the amount of active ingredients used to fill each bottle increases; therefore our contribution per case decreases. An alternative solution could be to invest in a more efficient production line for this drug. The quality of the production line that is being used for Linton is older and much slower than the other production lines in use. We would need to consider whether making improvements to the current production line or buying a completely ewe machine would be worth it for Lore verses using the current production line.

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