Question: Anna works for a firm that makes a machine that makes single shots of coffee, teas, and espresso-based drinks using a proprietary pod technology. The

Anna works for a firm that makes a machine that makes single shots of coffee, teas, and espresso-based drinks using a proprietary “pod” technology. The average pack of pods (with 12–16 pods) sells for $8.99 and has a unit of $4.00. The typical order is for four packs. While some orders are for four packs of the same drink, the average order contains two separate kinds of drinks (e.g., 3 packs of coffee and 1 of tea). Currently, the customer pays a shipping fee of $2.99 per order, regardless of the number of packs in the order. The firm projects sales of 4 million packs this year.
Anna is considering free shipping for orders for six or more packs. She believes that because it would increase average order size, the promotion would decrease the total number of orders to 60% of the current volume. However, only half of all orders would qualify for free shipping. Finally, the larger order size would also increase the kinds of drinks per order to three (from the current two kinds per order).
Anna notes that whenever an order comes in, the firm has to pick and put the requisite packs into a carton (for shipping), at a cost of $0.10 per pack. Moreover, each kind of drink in the order adds $0.50 to the cost of processing an order. Finally, the firm incurs costs of $6.00 per order to pack and ship the order. (For simplicity, assume that packing and shipping costs are the same regardless of order size.)

Required:
Evaluate the merits of Anna’s idea.

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With the old scheme we have Item Detail Amount Number of packs 4000000 Packs per order 4 Number of orders 1000000 Kinds of drinks per order 2 qualifyi... View full answer

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