Sandwich Bags

The following structure provides an overview of the case:

The interviewee should ask about the following issues:

• Capacity of the machine
• Demand for each kind of product
• Revenue / costs for each product
• Production time for each product

Information to be shared if the interviewee specifically asks for it

• 500 “bag-widths“ produced per hour per product type
• Machine run time:
  • 20 hours per day
  • 5 days a week
  • 50 weeks per year

The interviewee should calculate the total annual profit and production time per product line.

Main Conclusion

Under current capacity constraints (5000 hours/year), our client should produce 4” and 8” bags. This product mix generates the highest profit ($270k/year)

Information that can be shared if inquired by the interviewee:

• Cost of new roller = $750,000
• Payback needed = 5 yrs
• The roller will add an additional 5,000 hrs of machine run time
• A mature market, no dramatic changes
• Throughput growing at 2% due to efficiency of new roller

Possible answers:

• The demand growth rate could exceed 2%
• Since the current market is mature, we could introduce a new product
• We can rent out surplus machine production hours to increase revenue
• Prices must increase to increase revenue

Information to be shared if inquired by the interviewee:

• There is no lag time between production and market acceptance.
• Unrecovered investment from new roller = $150K
• Payback period = 5 years

Possible ways to gain $30,000 per year in profit from a new product:

• $0.03 profit per bag at 1M bags
• $0.015 profit per bag at 2M bags
• $0.01 profit per bag at 3M bags

Key Insights

Yes, there are two endpoints:

• The lower limit of demand depends on price sensitivity. A higher profit margin such as $1 per bag is not feasible as production quantities wouldn’t be worth it.
• The maximum demand we can serve depends on our production capacity. With the new roller, we can produce up to 4M of the new type of bag every year.

At the end of the case, the interviewee should come to the following conclusions:

• The client can best utilize their current capacity by producing 4” and 8” bags on the roller because the combined profitability from this product mix is highest at $270K per year.
• The client should NOT invest in a new bag machine because they cannot pay for the machine within 5 years. (They will still owe $150K.)
• However, investment in a new machine may make sense if we are able to meet the annual demand of 12” bags and find a way to monetize the machine’s surplus capacity.