## Problem Definition

Your client is a very **small consumer packaging** company. One of their **product lines** is **plastic bag**s that are designed to **store food**. They currently have one production machine dedicated to this product.

Since product **demand** currently **exceeds** your client’s **production** **capacity**, they want you to answer two key questions:

1. How can they **best utilize** their current **bag capacity**?

2. Should they **invest** in a **new bag machine**?

## Comments

Since this is an **interviewer-led case**, the interviewer should guide through the interview.

The case is split into **three parts**.

In the **first part,** the interviewee needs to **evaluate** existing **products** and **machine capacity**. The interviewee should **calculate** the client’s most profitable product mix, keeping production capacity in mind.

The **second part** is directed towards answering the **second** key **question** of **investment** in a new **bag machine**. The interviewee must **ask** for **more data** and answer this part mostly **qualitatively**.

The **third part** is optional. It is an extension of the case based on a possible recommendation from the second part. The interviewee must **calculate** the amount of **profit** that the **new product** must generate in order to justify investing in a new machine. The **interviewee** should also **sketch** and interpret the **elasticity curve**.

The **questions** in the big boxes should be read **aloud** to the interviewee.

## Short Solution (Expand)

## Detailed Solution

The following structure provides an overview of the case:

### I. Product/Capacity

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

**Diagram 2**with an

**overview**of the

**capacity**and

**Table 1**with an

**overview**of the

**product mix’s demand/profitability**if asked.

#### 1. What mix of products should our client produce?

**Information**to be shared if the interviewee specifically asks for it

**500 “bag-widths“**produced**per hou**r 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**.

**Bags produced per hr**

**Total annual profit**

**Production Time**

**4”** **bags**

# bags produced /hour = 500 x 6 = 3,000

Total annual profit = $0.02 x 9M = $180,000

**8” bags**

# bags produced /hour = 500 x 3 = 1,500

Total annual profit = $0.03 x 3M = $90,000

**12” bags**

# bags made /hour = 500 x 2 = 1,000

Total annual profit = $0.04 x 3M = $120,000

**Machine run time =** 20 hrs/day x 5 days/week x 50 weeks per yr**= 5000 hrs per yr**

**Table 2**with an

**overview**of the

**solution**when the interviewee is

**finished**with the calculation or gets

**stuck**.

**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)

### II. New Machine

#### 2. Should the client invest in another roller?

**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** **Mature market**, no dramatic changes**Throughput**growing at**2%**due to**efficiency**of new roller

The **interviewee** should realize that if the **new roller** is able to **meet** the currently-unmet **demand** for **12 bags**, our **client’s profit** would be $**600K** in **5 years**.

**Profit over 5 years **

= Annual profit from 12" bags * 5 yrs = $120,000 * 5 = **$600,000**

However, the client must pay for the roller within 5 years. There is a **profit** **shortfall** of $**150K**.

**Unrecovered investment **

= Profit over 5 yrs - Cost of new roller = $600,000 - $750,000

= **$150,000**

At the current demand level, **2,000 machine production hours** will **NOT** be **used**.

**Annual unused capacity of new roller **

= Machine run time - Capacity needed to meet 12" bags demand

= 5,000 - 3,000 hrs = 2,000 hrs

#### 3. Why might it be a good idea to invest in a new machine?

**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**

### III. New Product

#### 4. If we were to produce a new bag, what annual profit is required in order to justify investing in a new roller?

**Situation:**

The client’s R&D team has just come out with a **new** **bag**. It’s a 2-in-1 bag, one side holds your sandwich and the other side holds your chips or lettuce to keep things from getting soggy. **This bag is 6”. **

**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**

**Additional profit needed**

**Possible ways **to gain **$30,000 **per year i**n 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**

**NOT**suggest

**combinations**, ask them to

**suggest**a

**profit**per bag and the corresponding

**sales**

**volume**required.

#### 5. Draw the graph that represents the different profit/quantity combinations that would justify an investment in a new roller. Does this curve have any end points for our client given that the new machine will produce 6” bags @ 4 bags per bag-width for 2000 hours per year?

**Diagram 3**with the interviewee.

**Ke****y Insights**

Yes, there are **two end points**:

- 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 4**M of the new type**of bag every year.

**Bags made per hr**

Unused capacity = 2,000 hrs per year

**Maximum production level**

### IV. Conclusion

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**.

## Difficult Questions

### If we introduce a new product, what risks should we take into account?

**Possible answer:**

- The new product may
**cannibalize**the**sales**of our**existing****products**. Thus, it may be**harder**to**achieve**the**profit****required**to pay for the new machine within 5 years. - Since the machine produces
**two different kinds of products**, there may be**higher****operations**and**maintenance**costs.

**More questions to be added by you, interviewer!**

At the end of the case, you will have the **opportunity to suggest challenging questions** about this case (to be asked for instance if the next interviewees solve the case very fast).