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    3 Jayswac

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    Sumbla Tayyab
    Three Jays Corporation was incorrectly calculating costs that affected their Economic Order Quantity calculations. Setup costs were incorrectly including order processing and production line cleaning instead of just labor. Carrying costs omitted storage, obsolescence, and cost of capital. Unit costs only included materials, labor, and overhead allocation instead of all variable and fixed costs. When the costs were recalculated correctly using recommended methods, the Economic Order Quantities increased an average of 15-38% across product lines compared to the old incorrect calculations.

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    3 Jayswac

    Uploaded by

    Sumbla Tayyab
    3K views4 pages
    Three Jays Corporation was incorrectly calculating costs that affected their Economic Order Quantity calculations. Setup costs were incorrectly including order processing and production line cleaning instead of just labor. Carrying costs omitted storage, obsolescence, and cost of capital. Unit costs only included materials, labor, and overhead allocation instead of all variable and fixed costs. When the costs were recalculated correctly using recommended methods, the Economic Order Quantities increased an average of 15-38% across product lines compared to the old incorrect calculations.

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    Three Jays Corporation was incorrectly calculating costs that affected their Economic Order Quantity calculations. Setup costs were incorrectly including order processing and production line cleaning instead of just labor. Carrying costs omitted storage, obsolescence, and cost of capital. Unit costs only included materials, labor, and overhead allocation instead of all variable and fixed costs. When the costs were recalculated correctly using recommended methods, the Economic Order Quantities increased an average of 15-38% across product lines compared to the old incorrect calculations.

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    3K views4 pages

    3 Jayswac

    Uploaded by

    Sumbla Tayyab
    Three Jays Corporation was incorrectly calculating costs that affected their Economic Order Quantity calculations. Setup costs were incorrectly including order processing and production line cleaning instead of just labor. Carrying costs omitted storage, obsolescence, and cost of capital. Unit costs only included materials, labor, and overhead allocation instead of all variable and fixed costs. When the costs were recalculated correctly using recommended methods, the Economic Order Quantities increased an average of 15-38% across product lines compared to the old incorrect calculations.

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    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
    Page | 1

    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
    Cost

    Obsolescen
    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.
    Page | 2

    Three Jays Corporation


    The unit cost calculated in three jays was calculated by:

    Materials Cost
    Production Labor Cost
    Fixed Overhead Allocation

    PRODUCT (12 OZ)


    SALES/WK
    S=SETUP COST
    D=ANNUAL DEMAND
    (CASES)
    I=CARRYING COST
    C=FULL COST/CASE
    EOQ (OLD)
    ROP (3 WEEKS)

    3JS

    MARRAN

    KERRY

    DOM

    AAA

    57.56
    63.7

    44.90
    63.7

    28.69
    63.7

    17.04
    63.7

    12.02
    63.7

    2993
    2.5506
    0.009468
    76
    387
    173

    2335
    2.7468
    0.0130706
    64
    329
    135

    1492
    2.4174
    0.0180026
    81
    280
    86

    886
    2.6109
    0.0327426
    64
    208
    51

    625
    1.647
    0.042112
    183
    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)
    PRODUCT (12 OZ)
    SALES/WK
    S=SETUP COST
    D=ANNUAL DEMAND (CASES)
    I=CARRYING COST
    C=FULL COST/CASE
    EOQ (OLD)
    ROP (3 WEEKS)
    % INCREASE IN SALES

    3JS
    74.40
    63.7
    3869
    2.55
    0.0073
    2
    439.61
    223.21
    29.27

    MARRA
    N
    57.81
    63.7
    3006
    2.75
    0.01015
    373.39
    173.42
    28.74%

    KERRY

    DOM

    37.88
    63.7
    1970
    2.42
    0.0146
    5
    322.21
    113.65
    32.04

    23.29
    63.7
    1211
    2.61
    0.0239
    6
    243.09
    69.87
    36.68

    AAA
    16
    63.7
    832
    1.65
    0.03163
    253.69
    48.00
    33.12%
    Page | 3

    Three Jays Corporation

    % INCREASE IN EOQ

    %
    13.59
    %

    13.49%

    %
    15.08
    %

    %
    16.87
    %

    38.63%

    EOQ USING RECOMMENDED COSTS AND 2012 SALES


    DATA
    PRODUCT (12 OZ)
    SALES/WK
    S=SETUP COST
    D=ANNUAL DEMAND (CASES)
    I=CARRYING COST
    C=FULL COST/CASE
    EOQ (OLD)
    ROP (3 WEEKS)
    % INCREASE IN SALES
    % INCREASE IN EOQ
    ROP (4 WEEKS)

    3JS
    74.40
    37.5
    3869
    0.23
    25.79
    221
    223
    29%
    43.00
    %
    298

    MARRA
    N
    57.81
    37.5
    3006
    0.23
    27.97
    187
    173
    29%
    -43.00%
    231

    KERR
    Y
    37.88
    37.5
    1970
    0.23
    24.31
    163
    114
    32%
    42.00
    %
    152

    DOM

    AAA

    23.29
    37.5
    1211
    0.23
    24.46
    122
    70
    37%

    16
    37.5
    832
    0.23
    23.77
    107
    48
    33%

    -41.00%
    93

    -42.00%
    64

    Page | 4

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