this problem is to be treated as a one-period problem – that is, solve it as this only happens once! Winnies - is a small manufacturer of specialty Ales. They are currently planning to make batches of two somewhat related types - the David and the Goliath. The Goliath is sold in 1 liter bottles - the David in bottles holding only 1/3 of a liter. There are no limits on how much raw materials they can buy. The raw materials go through two stages before the Ale is finished: first, common raw materials are mixed with water in the large shared fermentation tank the company owns. This tank has a capacity 200,000 liter. After initial fermentation the product is put on bottles and separate additional ingredients is added to the two different Ales before the bottles are put in a warehouse for final in-bottle fermentation. Maximum demand is 320,000 bottles of David and 180,000 bottles of Goliath. The following information about costs and selling prices is available: David Goliath Selling price/bottle $2.5 $7.5 Raw Materials/liter $2 $3.25 Other variable cost/liter $1.2 $ .4 Other variable cost/bottle $ .2 $ .2 Capacity Costs/bottle $ .5 $1.5 The warehouse has 32,000 square feet of storage capacity. 7 bottles of Goliath takes up 1 square foot of storage capacity. Similarly 15 bottles of David takes up 1 square foot of storage capacity.

a) Using the Contribution Margin approach, how many units of David should Winnies produce as part of this batch?

b) How much would the other variable cost for David have to change for your answer to a) to change?

c) What would be the effect on the production of David if the change in costs you calculated in b) was to occur? 

d) If the variable cost remains as originally stated, how much would Winnies be willing to pay for 10,000 liters of extra tank capacity?

Answer rating: 100% (QA)

A David Goliath Selling Price 25 75 Raw Material 2 325 Other Variable cost bottle 2 ... View the full answer