THE CALORIE FOOD COMPANY

The Calorie Food Company manufactures a medium grade of jams and jellies. With
rising costs of labor and materials, the management of the company has been searching for
methods of cutting its production costs in order to maintain its level of earnings.

One method of reducing costs was recently brought to the company`s attention by the
sales engineer of one of the large sugar companies. He proposed that the company switch from
handling sugar in bag form to the use of either liquid or bulk sugar. He pointed out that the past
experience had shown that such change could affect a savings, resulting wholly from more
efficient materials handling of between Php10.00 and Php20.50 per 100-pound bag.

Since the company used approximately 23,000 bags of sugar a year, it felt that this
savings might make a substantial cost reduction possible. It asked the sugar company`s sales
engineer to survey the plant and to draw up a basic description of both the liquid and bulk
installation with respect to equipment, delivery, methods, cost of equipment and cost of sugar.

The following is the summary of the report submitted:

PRESENT METHOD

Sugar is delivered in trucks from public warehouse in multiples of 100 bags (Figure 1).
Two men unloaded the bags and place them on a pallets (ten to the pallet), which are then moved
by fork lift truck 100 feet to the elevator and taken to the storage floor. They are here taken
from the elevator by another fork lift truck and moved an average of fifty (50) feet to the point
of storage. Each morning, the fork lift moves the estimated day`s requirement to the head of a
chute leading to the cooking room. The bags are slid off the pallet and down the chute, and then
placed on the floor until needed. As each new batch of jam or jelly is prepared, a worker
carries the required bags 10 to 25 feet from the platform to the eight (8) cooking kettles, slits
them, and dumps the sugar in the kettles. Some batches require as much as 1,000 pounds of
sugar.

LIQUID SUGAR SYSTEM

Liquid sugar, which is sold for Php10.00 less than bagged sugar per hundred weight of
sugar content, consists of 66.5% sugar and 33.5% water. It is delivered in a tank truck, similar
to gasoline trucks. The liquid water is pumped out of the truck into the customer`s tank, which
can be located at any convenient point, outside or underground if desired. During production,
the sugar is pumped to the point of use and metered into the cooking kettles through a flexible
hose or pipes above each kettle.

The equipment required to handle liquid sugar is as follows:

1. An 8,000 gallon liquid sugar tank (the equivalent of about 590 bags)
equipped with sterile lamps, an air filter and a level indicator.
2. Pump
3. Strainer
4. Batching meter
5. Miscellaneous piping and wiring
 The cost of the above equipment, installed and ready to operate is about Php600,000.00;
annual maintenance cost are estimated at Php60,000.00.

BULK SUGAR SYSTEM

Bulk sugar is sold for Php15.00 less than bagged sugar per hundred weight. Sugar in
bulk form is delivered in either a bottom dump truck (similar to cement truck) or a rear dump
truck, both of which are dust-and-moisture tight. The sugar is dumped by gravity into a screw
conveyor, which leads to a bucket elevator. From the elevator, it falls either into the bulk
storage bin or into a screw conveyor leading to surge bin directly over the weighing station.
When sugar is desired at a cooking kettle, the scale automatically weights out the proper quantity
from the surge bin into a bucket on a monorail.

The bucket is them pushed to the desired kettle and then sugar is fed from the bottom of
the bucket at the desired rate by a small screw feed. Sugar is moved automatically as needed
from the storage bin to the surge tank by conveying mechanism activated by the pressure of
sugar. This system provides a completely automatic dust and moisture-tight method of handling
sugar to the point of use. The equipment consist of:

1. An 800-bag storage bin, insulated to prevent condensation which would

cause the sugar to cake.

2. A 30-ton-per-hour screw conveyor, with drive for unloading the truck.

3. A 30-ton-per-hour elevating conveyor with drive.

4. A 10-ton-per-hour screw conveyor with drive to carry sugar to the

weighing station

5. A 10-ton-per-hour screw conveyor with drive for taking sugar from the
bin to the elevating conveyor.

6. Batching Scale

7. A 50-bag surge bin

8. Monorail system leading to the cooking kettles with two (2) buckets
which have small screw conveyors attached.

The cost of such system, installed, is about Php950,000.00, maintenance cost is

estimated at Php95,000.00 per year.

Financing:

It is the policy of the sugar company to finance the cost of bulk or liquid sugar
installation. The cost is amortized over five (5) year period, at no interest on the basis of either
the differential in price or slightly higher rate, depending on the amount of sugar purchased
and the financial condition of the customer. This is the procedure followed in financing:

1. The customer is approved for credit by the sugar company.

 2. The customer has the system installed and presents the final bill to the
sugar company, which then reimburse the customer.

3. As sugar is delivered, the customer is billed at the bag rate or the bag
rate plus the difference in the agreed rate of amortization and the established
differential. The amount above of bulk or liquid price is then applied to the
amortization of the system.

4. The customer is required to purchase a certain minimum portion of his

sugar requirements from the sugar company financing the equipment, the percentage
to depend on the company`s estimated sugar requirements.

5. One-fifth of the total amount must be amortized each year. If insufficient

sugar has been purchased, the customer pays the difference.

In connection with financing, it should be noted that the differential on bulk or liquid
sugar is subject to change. It may be lowered or raised at any time. This, however, does not
change the rate of amortization.

After examining this report, various members of the management brought up several
problems which they felt should be considered before making a decision.

The purchasing agent objected to using bulk or liquid sugar because the company would
no longer be able to stock up on sugar at more favorable prices. He pointed out that sugar prices
customarily fluctuated during the year, reaching a peak at the time of the canning season. It had
been the purchasing agent`s practice to follow the market prices for refined sugar and purchase
large quantities when a price increase was indicated. He had made substantial savings for the
company in this way since each season, the price rise usually amounted to at least Php30.00 per
100-pound bag; there had been however, a few occasions on which money had been lost because
of price declines. If a bulk or liquid sugar system were installed, the purchasing agent would be
limited in this operation by the size of the storage tank or bin. He also pointed out that empty
paper bags were sold to a local savaging plant forPhp3.00 or Php4.00 each and this revenue
would be lost.

The production manager brought out the fact that if liquid sugar were used for all the
products, the increased cooking time required would increase fuel costs and might cause
difficulties in processing. Prolonged cooking which could cause a breaking up of the fruit in
preserves and a change in coloring which would not be consistent with the company`s present
standards of quality. This problem might be overcome by the installation of new cooking kettles
with control. This step, however, would have to be accompanied by training present personnel
in new methods or by hiring men with more technical training. The estimated cost of training
the present operators in the new methods was Php40,000; fuel costs would probably increase
about Php70,000 a year. Although all of this would entail a major plant change and an
investment of approximately Php750,000.00, it would at the same time, result in a more
carefully controlled process and therefore, a more consistent product.

The company treasurer questioned the advisability of being tied to one sugar company
through a financing contract which provided for purchase of a major portion of the sugar
requirements from the financing company. He felt that this restriction was inconsistent with
company`s policy of maintaining several sources of supply; moreover, it was conceivable that
once a sugar company felt that the business was down, it would not give as good service as in
the past. Another problem that was mention by the treasurer was that of taking inventory if a
bulk system were installed. Because of sugar piling up in the bin and conveyors, it would be
impossible to procure an exact count of the sugar on hand at inventory time.

PRESENT METHOD – BAG SUGAR

Sugar Storage
Elevator

Chute
Delivery
Truck Cooking Kettles

LIQUID SUGAR SYSTEM

 Air Filter

Sterile Lamp Meter

8000 Gal
Liquid
Storage Strainer Pump
Source

Cooking Kettles

BULK SUGAR SYSTEM

Screw Conveyor

Surge Bin

Storage Bin
Bucket on Mono Rail

Unloading Screw
Bucket Elevator

Truck Unloading Scale

Cooking Kettles

Unloading Screw