From: Charles Johnson of Cougar Consulting
Re: Fill Rate for 10 ounce bottles of Linatol
Lorex Pharmaceuticals recently gained FDA approval to market and sell a new product called Linatol. This memo will address the need to select a target amount to which each 10-ounce bottle of Linatol will be filled. The analysis of several target fill rates was conducted to determine the one that maximizes the contribution per case, therefore generating the maximum revenue for Lorex Pharmaceuticals. This ideal fill rate will allow more bottles to be sold at the full retail price of $186 and limit the under filled bottles that must be sold at a discount of $148.80. Target Fill Rate Analysis
The current challenge presented in this case concerns striking a balance between maximizing revenue and controlling costs. Currently, the only fill rate that had been examined was 10.2 ounces. This target fill rate was chosen arbitrarily during the filling line test and no data existed that would make it economically justifiable. By working with varying target fill rates, calculating the proportion of bottles that would be filled correctly, then subtracting the costs from the revenue, the performance measure of contribution per case becomes very apparent. See contribution per case calculation in Exhibit “A”. Based on data from the filling line test, calculations were conducted on target fill rates from 10.0 ounces to 10.5 ounces. Calculations are in Exhibit “B”. In order to accurately measure performance the first step was to determine which variables or costs would be relevant. Packaging cost per case, active ingredient cost per case, and rework cost per case were evaluated based on the effect they would have on the decision variable, which in this case is the target fill rate. Packaging cost per case became the only cost that was not calculated...