Each morning, Nate Jeppson stocks the drink case at Nates Beach Hut in Long Beach, California. Nates
Question:
1. Cola in 12- oz. cans for $ 1.40 per can
2. Bottled water in 20- oz. plastic bottles for $ 1.85 per bottle
3. Orange juice in 20- oz. glass bottles for $ 2.30 per bottle
Nate’s Beach Hut pays its suppliers the following:
1. $ 0.20 per 12- oz. can of cola
2. $ 0.30 per 20- oz. bottle of spring water
3. $ 0.70 per 20- oz. bottle of orange juice
Nate’s Beach Hut’s monthly fixed expenses include the following:
Hut rental............................................................................................................... $ 385
Refrigerator rental.................................................................................................. 60
Nate’s salary........................................................................................................... 1,550
Total fixed expenses............................................................................................... $ 1,995
The beverage stand can sell all drinks stocked in the display case each morning.
Requirements
1. What is the constraining factor at Nate’s Beach Hut? What should Nate 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 Nate refuses to devote more than 65 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?
Contribution Margin
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Akshay Agarwal
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