Question

Pallets of Cake Mix Demanded	Probability	Cumulative Probability
Fewer than 2	0.10	0.10
2	0.30	0.40
3	0.55	0.95
4	0.04	0.99
5	0.007	0.997
6	0.003	1.00
Sum:	1

Just Baked grew from one retail store in 2009 to thirteen stores in early 2013. Demand for cupcakes exhibits patterns based on seasons, store location, day of the week, and time of day. The "freshness promise" implicit in the name Just Baked has to be supported by the daily baking and topping of thousands of cupcakes at the Livonia bakery as well as early-morning delivery of cupcakes to each store.

Just Baked cupcakes sold at retail stores for prices ranging from about $2.30 each for simpler cupcakes by the dozen up to about $3.50 for the fanciest cupcakes sold individually. Most of the cupcakes were sold in 2-packs priced at $5.50. An approximate overall average selling price was $2.75 per cupcake. Franchisees were charged $1.25 per cupcake. Company-owned stores were also “charged” the same transfer price of $1.25 per cupcake. Total variable costs per cupcake out of the Livonia bakery were about $0.50, representing $0.25 in direct material and $0.25 in variable labor. Cupcakes not sold by the end of the day were discarded. Just Baked credited the stores $0.75 for each unsold/discarded cupcake.

Research indicated that customers were generally willing to purchase cupcakes from those available, even if they had to substitute a second choice for a most-preferred flavor. For the purposes of this exercise, understocking costs are confined to the immediate lost sales profit.

In practice, Just Baked did not permit franchisees to make their own cupcake-ordering decisions. Instead, cupcakes were baked and delivered to all stores based on centralized decisions.

When Pam Turkin began the business in her kitchen, she used a particular brand of packaged cake mix in two flavors (vanilla and chocolate) as the basic material on which all the Just Baked (JB) flavor recipes were variations. Even though the business had grown dramatically, this recipe structure remained. The cake mixes were bought in pallet-load quantities for JB. Due to the strong weekly cupcake sales pattern, inventory planning for cake mix was done on a weekly basis. Cake mix orders were placed with a grocery store chain distribution warehouse. Cake mixes were delivered 3 days after order placement.

Occasionally, the grocery warehouse had insufficient inventory to fill JB’s orders, resulting in insufficient raw material to support JB’s baking operations. When this happened, JB employees would drive to grocery stores in the Livonia vicinity and buy boxes of cake mix off the store shelves until they had enough to support the baking operations. This typically required visits to about 20 retail stores, and in Turkin’s words “it takes all day.” Coping with this situation required an average of 15 hours of employee overtime and cost $20 per hour inclusive of mileage expenses. Prices paid in the stores were also higher, amounting to an extra cost per pallet of $300.

Although Just Baked had grown via reinvestment of retained earnings, 12% is a reasonable approximation for the relevant annual cost of capital i which should be considered to apply to inventory holding of cake mix. Assume 360 days per year. Physical holding costs are negligible at the margin, since the Livonia facility has sufficient warehouse space to accommodate all reasonable inventory required. Obsolescence and shelf life considerations also do not apply to cake mixes, which are typically coded for sale up to eighteen months after packing. The value of a pallet of cake mix at JB’s cost including delivery charges is $1000.

Real butter and fresh eggs are also important ingredients in Just Baked cupcakes. These are managed according to a continuous review system and ordered whenever inventory levels reach a reorder point. Annual demand D for eggs is 600,000. The cost of placing an egg order S, including delivery charges, is $40. Lead time for eggs is 1 day. Holding costs for eggs are dominated by their limited shelf life and the requirement that they be held in cold storage and handled with care. These costs total $0.02 per egg per day. Financial holding costs are negligible.

Daily demand for eggs averages about 1600, but there are significant variations from day to day. The standard deviation of daily egg demand is 400. Daily demand for eggs is approximately normally distributed.

1) Suppose that Just Baked wanted to get out of the business of running stores and therefore sold off all the company-owned stores to franchisees. That means that now ALL stores are franchises. Assuming demand distributions remained the same, how would the number of cupcakes ordered when all stores are franchises compare to when some of the stores are company-owned?

A. More cupcakes would be ordered if all stores were franchises

B. Less cupcakes would be ordered if all stores were franchises

C. The same number of cupcakes would be ordered. It doesn't matter if stores are company-owned or a franchise

Answer 1

Hello

OPTION C

I believe that the same number of cupcakes would be ordered irrespective of the face that the store is company - owned or a franchise.

The demand distributions remains the same and the product manufacturer is the same, i.e. it is produced and supplied through its bake house or central baking point. Same transfer price of $1.25 is charged irrespective that it is company- owned or franchise which allows an equal degree of autonomy to franchise as compared to conmany-owned.

Hence, the same number of cupcakes will be ordered.

I hope this solves your doubt.

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