Three Jays Corporation

QUESTIONS

Question # 1 (A):

What is wrong with the Three Jays Corporation's cost calculations

which are affecting the calculations of EOQ?

Answer:

Three Jays Corporation:

The case talks about Brodie Arens who is an MBA student and summer intern at Three Jays
Corporation, a jam and jelly manufacturer in Michigan. Brodie's first assignment as an intern is
to update the inventory and production planning system. Initially, he begins by updating the
Economic Order Quantities (EOQ) and Reorder Points (ROP) for each product. However, he
soon learns that the formal production planning system was being ignored by the workers on the
factory floor. Consequently, Brodie has to decide what should be done with the system and how
to implement his recommendations. This case illustrates the 2 major types of errors that can
occur when using Economic Order Quantity (EOQ) as a tool in production scheduling.

Three Jays Cost Calculations:

Three Jays cost calculations was calculated ineffectively in the following type of costs:

 Setup Costs
 Carrying Costs
 Unit Costs

These costs are explained as follows:

Setup Costs:

Setup cost is the cost incurred to get equipment ready to process a different batch of goods.
Hence, setup cost is regarded as a batch-level cost in Activity Based Costing (ABC). Setup costs
include the costs of changing the tools or dies on the equipment, moving materials or
components, and testing the initial output to be certain it meets the specifications. In addition to
the out-of-pocket costs, such as the labor cost of setting up the equipment, there is a much
greater cost. The greater cost of setup is the lost opportunity of manufacturing profitable output
while the machine is idled during the setup time. Setup cost is viewed as a non-value-added cost
that should be minimized.

In three Jays Corporation, the setup cost which was calculated was on the basis of:

 Order Processing Cost

 Production, Prep, Cooking and Cleaning Cost

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Three Jays Corporation

 Size Changeover Cost

 Production-line Cleaning Cost

The setup cost which should have been included in the three Jays Corporation was the:

 Order Processing and

 Production line cleaning cost

Calculation of Set-up Cost:

= 3 workers * $12.50 per hour * 1 hour

=$37.50

Set-up costs include the directly relevant to line production e.g. labor.

Carrying Costs:

Carrying cost is the cost a business incurs over a certain period of time, to hold and store its
inventory. Businesses use this figure to help them determine how much profit can be made on
current inventory. It also helps them find out if there is a need to produce more or less, in order to
keep up with expenses or maintain the same income stream

Breakdown of Carrying Costs:

Storage

Carrying Obsolescen
Cost ce

Cost of
Capital

Unit Costs:

The cost incurred by a company to produce, store and sell one unit of a particular product. Unit
costs include all fixed costs (i.e. plant and equipment) and all variable costs (labor, materials,
etc.) involved in production.

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Three Jays Corporation

The unit cost calculated in three jays was calculated by:

 Materials Cost
 Production Labor Cost
 Fixed Overhead Allocation

PRODUCT (12 OZ) 3JS MARRAN KERRY DOM AAA

SALES/WK 57.56 44.90 28.69 17.04 12.02

S=SETUP COST 63.7 63.7 63.7 63.7 63.7
D=ANNUAL DEMAND
(CASES) 2993 2335 1492 886 625
I=CARRYING COST 2.5506 2.7468 2.4174 2.6109 1.647
0.009468 0.0130706 0.0180026 0.0327426
C=FULL COST/CASE 76 64 81 64 0.042112
EOQ (OLD) 387 329 280 208 183
ROP (3 WEEKS) 173 135 86 51 36

Question # 1 (B):

Using case Exhibits data please make a comparison between OLD

EOQ (incorrect costs) and NEW EOQ (correct costs). Print a SINGLE
EXCEL sheet (according to the attached FORMAT).

Answer:

COMPARISON between OLD EOQ and NEW EOQ:

EOQ USING EXISTING METHOD (USING 2012 SALES DATA AND DATA
GIVEN IN EXHIBIT 2)

MARRA
PRODUCT (12 OZ) 3JS N KERRY DOM AAA

SALES/WK 74.40 57.81 37.88 23.29 16

S=SETUP COST 63.7 63.7 63.7 63.7 63.7
D=ANNUAL DEMAND (CASES) 3869 3006 1970 1211 832
I=CARRYING COST 2.55 2.75 2.42 2.61 1.65
0.0073 0.0146 0.0239
C=FULL COST/CASE 2 0.01015 5 6 0.03163
EOQ (OLD) 439.61 373.39 322.21 243.09 253.69
ROP (3 WEEKS) 223.21 173.42 113.65 69.87 48.00
% INCREASE IN SALES 29.27 28.74% 32.04 36.68 33.12%

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Three Jays Corporation

% % %
13.59 15.08 16.87
% INCREASE IN EOQ % 13.49% % % 38.63%

EOQ USING RECOMMENDED COSTS AND 2012 SALES

DATA

MARRA KERR
PRODUCT (12 OZ) 3JS N Y DOM AAA

SALES/WK 74.40 57.81 37.88 23.29 16

S=SETUP COST 37.5 37.5 37.5 37.5 37.5
D=ANNUAL DEMAND (CASES) 3869 3006 1970 1211 832
I=CARRYING COST 0.23 0.23 0.23 0.23 0.23
C=FULL COST/CASE 25.79 27.97 24.31 24.46 23.77
EOQ (OLD) 221 187 163 122 107
ROP (3 WEEKS) 223 173 114 70 48
% INCREASE IN SALES 29% 29% 32% 37% 33%
- -
43.00 42.00
% INCREASE IN EOQ % -43.00% % -41.00% -42.00%
ROP (4 WEEKS) 298 231 152 93 64

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