Cougar Consulting
Memorandum
To: Carter Blakely, Manager of Quality Assurance, Lorex Pharmaceuticals
From: Bulent Guneyli, Business Consultant, Cougar Consulting
Date: 6/15/2013
Re: Fill Rate for 10 ounce bottles of Linatol
The purpose of this memo is to determine the target bottle fill rate (TFR) which will
maximize the contribution of Linatol to Lorex Pharmaceuticals. In order to calculate the
maximum contribution (MC), we need to find out what the expected revenue (ER) per case
is and subtract the expected variable cost (EVC) per case from it.
MC= ER *€“ EVC
Expected Revenue(ER) per Case
Expected revenue can be formulated as the percentage of acceptable cases (AC) which
contain bottles that were filled above the required 10-ounce level multiplied by the
wholesale price $186 plus percentage of second cases (SC) which contain underfilled
bottles multiplied by second market wholesale price ($180*.8=$148.8)
ER= % (AC) * $186 + % (SC) * $148.8
The goal is to maximize the percentage of the acceptable cases which will minimize the
percentage of second cases because
% (SC) = 1 – % (AC)
This approach will consequently yield the highest ER based on the ER equation above.
Expected Variable Cost (EVC) per Case
Expected variable cost has three components:
– Active ingredient cost (AIC)
– Blending labor cost (BLC)
– Seconds packing cost (SPC)
Active Ingredient Cost (AIC):
AIC= (active ingredients + blending direct labor) / (# of ounces in a batch*)
*1 liter = 33.8140227 US fluid ounces
AIC= ($67,662 + $432) /169,070
AIC = 0.4027 $/oz
When we determine the material cost per case, we can multiply the AIC which is
expressed as dollar amount per ounce by the target fill rate (TFR).
Seconds packing cost (SPC):
Each worker is capable of repacking 12 cases per hour and he/she is paid $8.5 /hour. Thus,
repacking cost per case is:
$8.5/12=$0.7083 /case
So, repacking cost per case is
SPC= % (SC) * $0.7083
From active ingredient and seconds packing cost equations, expected Variable Cost (EVC)
can be formulated as:
EVC= TFR * 0.4027 + % SC * 0.7083
Going back to the equation to find the maximum contribution, we will need to find the %
of acceptable and second cases. This will depend on the target bottle fill rate.
Scenario 1
According to the filling-line test results, standard deviation was 0.16 with a mean of 10.2
oz set for the test. This means that about 68% of the 144 observations were between 10.04
oz and 10.36 oz. This also implies that 16% of the observations were less than 10.04 oz.
We want to find the target fill rate which will maximize the % of acceptable cases, cases