Date: 18th Feb2012 To, The CEO, Amore Frozen Foods (A), Cortland, New York, USA Sub:

Recommendation of the revised fill targets of Macaroni and cheese in a container Dear Sir, We sincerely thank you for giving this opportunity to study the problem of catch- 22 situation of revising fill target of Macaroni and cheese in a container facing by M/s Amore Frozen Foods (A). We have analyzed the problem meticulously with given data and recommended fill target which optimize the product level as well as bottom line of the balance sheet. Some assumptions have been considered while making recommendation. Assumptions are as below: 1. The cost of raw material, labor, Packaging and overhead are constant (same as standard cost) for entire one year. 2. Energy crisis is over and not considered for subsequent years. Therefore possibility of substantially underweight due to dehydration is minimal. 3. Sample of 5 consecutive pies taken at the beginning of a 20 minute run is independent. 4. Rejected pies are first sold at thrift store till the limit of 240 dozen per month and excess donated to charity. 5. The filling device of Macaroni & cheese could fill which is normally distributed around the target value with standard deviation of 0.22 ounce. Samples are also assume normally distributed Production Level: Preparation Area 11 Minutes Blending Horizontal Mixer 9 Minutes Filling Line Frozen Storage 40 Minutes

Raw Material

For every 20 Minutes production line produced 1000 dozens pies. Monthly Production 60,000 dozens pies Yearly Production - 720,000 dozens pies (12* 60,000) No of case in a year 360,000 cases Contribution Margin: In case of Normal sale Selling Price (per dozen) $ 4.50 Std Cost (Per dozen) $ 3.0 Contribution Margin (per dozen) $ 1.50 Thrift store sale (till 240 dozen per month) $ 3.60 $ 3.0 $ 0.60

Recommendations:

Wt. of pies 8.44 8.22 8.25 8.00

Raw material cost ($ millions) 1.31 1.28 1.28 1.24

Profitability ($ millions) 1.08 1.09 1.11 -2.07

2 1 0 -1 -2 -3 8.44 8.22 8.25 8

1.35 1.3 1.25 1.2

Profitability in $ml. RAW Matl Cost in $

From table and graphical representation, it is clearly evident that profit is maximized at target fill of 8.25 Oz per pies. Case-I: Target Fill 8.44 Oz (Appendix-1) In this case, almost all pies are having overweight and hence all pies have sold on $ 4.5 per dozen. Since target fill weight is 8.44 Oz, raw material cost has gone up and subsequently impacted profitability. No pies have been sent to thrift store and likely to get fined as no pies are underweight. Case II: Target Fill 8.22 Oz (Appendix-2) 98.75% of pies are having weight more than 8.0 Oz and as per company policy, it can be sold at $4.5 per dozen. 1.25% of total production i.e. 9000 dozen pies are having less than 8.0 Oz weight. Since it is not substantial under weight (< 7.5 Oz), even if underweight pies are marketed, no fine is levied. But as per company policy, underweight pies have been sent to thrift store where we can sell up to 2880 dozen in a year and store 1000 dozen which can be sold subsequently. Balance pies have been distributed in charity. Profitability has come down on account of charity. Case III: Target Fill 8.25 Oz (Appendix-3) As solution of this problem, we suggest that maximum underweight Amore can produced is 3880 dozen pies which can be sold and inventoried for subsequent sale. It comes 0.54% of total production. On working, the target weight has come out as 8.25 Oz. Profitability is maximum for this fill target.

Case IV: Target Fill 8.00 Oz (Appendix-4) If target weight is exactly 8.0 Oz, it is very less probability to get pies weight 8.0 Oz or more on account of evaporation. Sales are envisaged through thrift sales only. Amore will get loss, if target fill is exactly 8.0 Oz. Therefore, we recommend M/s Amore frozen food to consider target fill is 8.25 Oz. Hope it will help you out in getting maximum profit without getting any fine on account of underweight by authority.

Thanking You,

Your sincerely Mr. Kapil Jain, WMP 7097 Mr. Karan Manchanda, WMP 7098 Mr. Kumar Mangalam, WMP 7099 Mr. Kumar Saurabh Kant, WMP7100 Mr. Manish Gupta, WMP7101 Mr. Md. Kaif Akbar, WMP 7103 Indian Institute of Management, Lucknow Noida Campus, India

Appendix-1 In case target fills is 8.44 Oz per container: Sample size = 5

Population St. Deviation : 0.22 Oz Populations mean 8.0 Oz Now Probability of Package to be overweight calculated as: Z = (X - )/ / n = (8.44 8.0)/ (.22/ 5) = ( .44*2.24)/.22 = 4.48 Now from standardized normal distribution table: Probability at Z= 4.48 is P = 0.99996 i.e. 99.99 % is more than 8.0 Oz weight pie if target fill is 8.44 Oz There is negligible percentage of underweight in case of filling target is 8.44 Oz. Almost all package will get through FDA- approved weight. In this case, no fine due to underweight attracts to Amore Frozen foods. No samples will either go to the thrift store also. Annual Profitability: Assuming that all production will get sold in the same year $ 3,240,000/$ 1310400 $ 849600 $ 2,160,000 ($4.5* 720000) ($1.82*720000) (1.18*720000)

Net Revenue from Sales Raw Material Cost Other cost Total Cost

Annual Profit

- $ 1,080,000/-

$(3240000 2160000)

Appendix-2 In case target fills is 8.22 Oz per container: Sample size: 5 Population St. Deviation : 0.22 Oz Populations mean: = 8.0 Oz Now Probability of Package to be overweight calculated as: Z = (X - )/ / n = (8.22 8.0)/ (.22/ 5) = (.22*2.24)/.22 = 2.24 Now from normal distribution table: Probability at Z=2.24 P = 0.9875 i.e. 98.75 % is more than 8.0 Oz weight pie if target fill is 8.22 Oz 1.25% of production will be less than 8.0 Oz and underweight in case of filling target is 8.22 Oz. Annual underweight quantity = 9000 dozen (1.25% of 720000 dozen) Maximum Sales through Thrift store in a year = 2880 dozen (240*12) Thrift can store maximum 1000 dozen Out of 9000 under weight, maximum 3880 can be sold with positive contribution margin of $0.60 per dozen, balance will be distributed as charity Annual Profitability: Assuming that all production will get sold in the same year

Net Revenue from Sales a. Normal Sales ( 711000 dozen) $ 3199500 b. Thrift Sales (3880 dozen) $ 13968 Total Annual Revenue $ 3213468 Raw Material Cost $ 1276242 Other cost $ 849600 Total Cost $ 2125842 Annual Profit - $ 1087626 5120 dozen have been distributed in charity.

($4.5* 711000) ($3.6*3880) (($1.82*8.22/8.44*720000) (1.18*720000)

Appendix-3 Optimum Value: In case target fills is the quantity at which only 3880 dozen pies will be underweight: Total production 720,000 dozen, Percentage to be underweight for complete sale through Thrift store = 0.54% (3880*100/720000) Therefore, 99.46% pies are more than 8 Oz weight. Z value for, P= .9946, Z= 2.55 (From Table) Sample size: 5 Population St. Deviation: 0.22 Oz Populations mean: 8.0 Oz Now Probability of Package to be overweight calculated as: Z = (X - )// n , 2.55 = (X 8.0)/ (.22/ 5) = (X-8)*2.24)/.22, X = 8.25 Oz Target fill = 8.25 Oz per pie Hence if target weight is 8.25 Oz, there is probability that 0.54% i.e 3880 dozen pies will be under weight and will be sold through thrift store.

Annual underweight quantity = 3880 dozen (.54% of 720000 dozen) Maximum Sales through Thrift store in a year = 2880 dozen (240*12) Thrift can store maximum 1000 dozen Maximum 3880 can be sold with contribution margin of $0.60 per dozen (Assumption) Annual Profitability: Assuming that all production will get sold in the same year

Net Revenue from Sales a. Normal Sales ( 716120 dozen) b. Thrift Sales (3880 dozen) Total Annual Revenue Raw Material Cost Other cost Total Cost Annual Profit

$ 3222540 $ 13968 $ 3236508 $ 1280900 $ 849600 $ 2130500

($4.5* 716120) ($3.6*3880) (($1.82*8.25/8.44*720000) (1.18*720000)

- $ 1106007

Appendix-4 In case target fills is 8.0 Oz per container: Sample size: 5 Population St. Deviation : 0.22 Oz Populations mean: = 8.0 Oz Now Probability of Package to be overweight will be negligible. If evaporation takes place, almost all pies will be less than 8.00 Oz. Hence as per policy of Amore frozen foods, no pies qualify for sale. Only thrift store is able to sale 3880 material.

Maximum Sales through Thrift store in a year = 2880 dozen (240*12) Thrift can store maximum 1000 dozen Out of 720000 under weight, maximum 3880 can be sold with positive contribution margin of $0.60 per dozen, balance will be distributed as charity Annual Profitability: Assuming that all production will get sold in the same year

Net Revenue from Sales a. Normal Sales ( 0 dozen) b. Thrift Sales (3880 dozen) Total Annual Revenue Raw Material Cost Other cost Total Cost Annual Profit

$0 -

$ 13968 $ 13968

($4.5*0) ($3.6*3880)

$ 1242085 (($1.82*8.00/8.44*720000) $ 849600 (1.18*720000) $ 2091685 - $(2077717)

716120 dozen have been distributed in charity.

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