Chapter 8, Problem 8.42BE

Determine product mix for retailer—two stocking scenarios (Learning Objective 5)

Each morning, Max Rouse stocks the drink case at Max’s Beach Hut in Daytona Beach, Florida. Max’s Beach Hut has 120 linear feet of refrigerated display space for cold drinks. Each linear foot can hold either five 12-ounce cans or four 20-ounce plastic or glass bottles.

The beverage stand sells three types of cold drinks:

1. 1. Diet cola in 12-oz. cans for $1.60 per can
2. 2. Bottled water in 20-oz. plastic bottles for $1.80 per bottle
3. 3. Grape juice in 20-oz. glass bottles for $2.25 per bottle

Max’s Beach Hut pays its suppliers the following:

1. 1. $0.15 per 12-oz. can of diet cola
2. 2. $0.30 per 20-oz. bottle of water
3. 3. $0.70 per 20-oz. bottle of grape juice

Max’s Beach Hut’s monthly fixed expenses include the following:

Hut rental	$ 360
Refrigerator rental	75
Max’s salary	1.750
Total fixed expenses	$2,185

The beverage stand can sell all the drinks stocked in the display case each morning.

Requirements

1. 1. What is the constraining factor at Max’s Beach Hut? What should Max stock to maximize profits? What is the maximum contribution margin he could generate from refrigerated drinks each day?
2. 2. To provide variety to customers, suppose Max refuses to devote more than 75 linear feet and no less than 15 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. 3. Assuming the product mix calculated in Requirement 2, what contribution margin will be generated from refrigerated drinks each day?