Business – K’s Brewery is also evaluating different approaches

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K’s Brewery is also evaluating different approaches to the decision where to locate the second brewery. These approaches consider a) operations costs for each facility; and b) if the capacity to be added at either Magdeburg or Zwickau is sufficient/too much.
a) Operations cost
Total fixed (production) costs can be calculated from the information in part 1b). Raw materials costs have to be added; however, in particular the cost for hops has seen significant fluctuations due to bad harvests. The following table is based on data for the past 5 years and shows the probability for raw materials costs per 1000 cases beer brewed. What would be the expected cost of raw materials per 1000 cases? Round to an integer. (Total points 11)
Determine total operations cost per 1000 cases for each facility that includes the expected cost for raw material plus the before mentioned fixed costs.

Cost per 1000 cases beer brewed Probability
€1800 0.08
€2000 0.12
€2200 0.25
€2400 0.2
€2600 0.2
€2800 0.15

b) The management of K’s brewery is also contemplating if the currently planned additional capacity is sufficient (or too much). The plans include a capacity for Zwickau of 1250, 1500 or 1700 (in 1000 cases), and for Magdeburg 1500, 1700 ,or 2200. Besides the immediate forecasts for the next month (Part 1a), long-term forecasts of demand were undertaken to judge aggregated (across all regions) demand depending on the state of the economy. Depending on the size of the new facility, productions costs per 1000 cases will change also (due to increased or decreased economies of scale). If capacity and demand do not match, the following happens: if capacity is above demand, the brewery will brew just according to demand; if capacity is below demand, K’s brewery needs to subcontract, which incurs cost subcontracting costs. The Part2 input data file includes all relevant information. . The probability for a good economy is estimated at 0.3, for a medium economy also at 0.3 and 0.4 for a bad economy. A case of beer sells for Euro4. Hints: You need to calculate aggregated costs (i.e. totaled for aggregated production including raw material costs, based on your answer from part a), and then profits for the three different sizes of each facility, and for each economic state of nature. Determine which location should be chosen, and which size. Discuss your findings.

Zwickau
Capacity Resulting total
in 1000
capacity (all
cases
breweries)
1250
1500
1700

5450
5700
5900

Magdeburg
Capacity Resulting total
in 1000
capacity (all
cases
breweries)
1500
1700
2200

5700
5900
6400

Cost per 1000
cases

Expected aggregated Expected
Expected
Subcontracting cost
sales good economy aggregated sales
aggregated
per 1000 cases
(in 1000 cases)
medium economy (in sales bad
1000 cases)
economy (in
1000 cases)
1,800.00
6000.00
5000.00
4300.00
2,500.00
1,600.00
6000.00
5000.00
4300.00
2,500.00
1,400.00
6000.00
5000.00
4300.00
2,500.00

Cost per 1000
cases

Expected aggregated Expected
Expectedaggreg Subcontracting cost
sales good economy aggregated sales
ated sales bad per 1000 cases
(in 1000 cases)
medium economy (in economy (in
1000 cases)
1000 cases)
1,600.00
6000.00
5000.00
4300.00
2,500.00
1,400.00
6000.00
5000.00
4300.00
2,500.00
1,300.00
6000.00
5000.00
4300.00
2,500.00

Expected sales are given for 1 month.
The capacity is also monthly capacity.

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