Warren's Ice Cream makes 4 different flavors of ice cream using their secret process and top-secret recipes. Each of their flavors is equally popular and experiences a demand of 5,000 gallons/year. Warren's process is capable of producing 100 gallons/day once they incur the $25 setup cost. The ice cream holding cost is 10% of the $5 per gallon price. Warren's plant runs 250 days a year and stays busy doing so, but management feels they can add another flavor to their product line and increase their revenue. Which of the following statements is appropriate for this scenario?
A) Warren's can comfortably add a fifth flavor without increasing the number of days they operate.
B) Warren's cannot add the fifth flavor because the holding cost would increase.
C) Warren's can add the fifth flavor only if there is zero setup time between flavors.
D) Warren's cannot add the fifth flavor because demand would exceed capacity.

Question

Quizplus · Accepted Answer

Since Warren's plant runs for 250 days a year and Warren's process is capable of producing 100 gallons/day, the maximum production capacity is 25,000 gallons/year (250 days x 100 gallons/day). With only four flavors, the total demand is 20,000 gallons/year (5,000 gallons/year x 4 flavors). That means there is a potential production capacity of 5,000 more gallons/year. Adding a fifth flavor would require a $25 setup cost, which is affordable, and there is room in the production capacity to meet the potential demand. Therefore, the best choice is C - Warren's can add the fifth flavor only if there is zero setup time between flavors.

Warren's Ice Cream Makes 4 Different Flavors of Ice Cream