Three Jays Corporation

QUESTIONS
Question # 1 (A):
What is wrong with the Three Jays Corporation's cost calculations
which are affecting the calculations of EOQ?
Answer:
Three Jays Corporation:
The case talks about Brodie Arens who is an MBA student and summer intern at Three Jays
Corporation, a jam and jelly manufacturer in Michigan. Brodie's first assignment as an intern is
to update the inventory and production planning system. Initially, he begins by updating the
Economic Order Quantities (EOQ) and Reorder Points (ROP) for each product. However, he
soon learns that the formal production planning system was being ignored by the workers on the
factory floor. Consequently, Brodie has to decide what should be done with the system and how
to implement his recommendations. This case illustrates the 2 major types of errors that can
occur when using Economic Order Quantity (EOQ) as a tool in production scheduling.
Three Jays Cost Calculations:
Three Jays cost calculations was calculated ineffectively in the following type of costs:

Setup Costs
Carrying Costs
Unit Costs

These costs are explained as follows:

Setup Costs:
Setup cost is the cost incurred to get equipment ready to process a different batch of goods.
Hence, setup cost is regarded as a batch-level cost in Activity Based Costing (ABC). Setup costs
include the costs of changing the tools or dies on the equipment, moving materials or
components, and testing the initial output to be certain it meets the specifications. In addition to
the out-of-pocket costs, such as the labor cost of setting up the equipment, there is a much
greater cost. The greater cost of setup is the lost opportunity of manufacturing profitable output
while the machine is idled during the setup time. Setup cost is viewed as a non-value-added cost
that should be minimized.
In three Jays Corporation, the setup cost which was calculated was on the basis of:

Order Processing Cost

Production, Prep, Cooking and Cleaning Cost
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Three Jays Corporation

Size Changeover Cost

Production-line Cleaning Cost

The setup cost which should have been included in the three Jays Corporation was the:

Order Processing and

Production line cleaning cost

Calculation of Set-up Cost:

= 3 workers * $12.50 per hour * 1 hour
=$37.50
Set-up costs include the directly relevant to line production e.g. labor.
Carrying Costs:
Carrying cost is the cost a business incurs over a certain period of time, to hold and store its
inventory. Businesses use this figure to help them determine how much profit can be made on
current inventory. It also helps them find out if there is a need to produce more or less, in order to
keep up with expenses or maintain the same income stream
Breakdown of Carrying Costs:

Storage
Carrying
Cost

Obsolescen
ce
Cost of
Capital

Unit Costs:
The cost incurred by a company to produce, store and sell one unit of a particular product. Unit
costs include all fixed costs (i.e. plant and equipment) and all variable costs (labor, materials,
etc.) involved in production.
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Three Jays Corporation

The unit cost calculated in three jays was calculated by:

Materials Cost
Production Labor Cost
Fixed Overhead Allocation

PRODUCT (12 OZ)

SALES/WK
S=SETUP COST
D=ANNUAL DEMAND
(CASES)
I=CARRYING COST
C=FULL COST/CASE
EOQ (OLD)
ROP (3 WEEKS)

3JS

MARRAN

KERRY

DOM

AAA

57.56
63.7

44.90
63.7

28.69
63.7

17.04
63.7

12.02
63.7

2993
2.5506
0.009468
76
387
173

2335
2.7468
0.0130706
64
329
135

1492
2.4174
0.0180026
81
280
86

886
2.6109
0.0327426
64
208
51

625
1.647
0.042112
183
36

Question # 1 (B):
Using case Exhibits data please make a comparison between OLD
EOQ (incorrect costs) and NEW EOQ (correct costs). Print a SINGLE
EXCEL sheet (according to the attached FORMAT).
Answer:
COMPARISON between OLD EOQ and NEW EOQ:
EOQ USING EXISTING METHOD (USING 2012 SALES DATA AND DATA
GIVEN IN EXHIBIT 2)
PRODUCT (12 OZ)
SALES/WK
S=SETUP COST
D=ANNUAL DEMAND (CASES)
I=CARRYING COST
C=FULL COST/CASE
EOQ (OLD)
ROP (3 WEEKS)
% INCREASE IN SALES

3JS
74.40
63.7
3869
2.55
0.0073
2
439.61
223.21
29.27

MARRA
N
57.81
63.7
3006
2.75
0.01015
373.39
173.42
28.74%

KERRY

DOM

37.88
63.7
1970
2.42
0.0146
5
322.21
113.65
32.04

23.29
63.7
1211
2.61
0.0239
6
243.09
69.87
36.68

AAA
16
63.7
832
1.65
0.03163
253.69
48.00
33.12%
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Three Jays Corporation

% INCREASE IN EOQ

%
13.59
%

13.49%

%
15.08
%

%
16.87
%

38.63%

EOQ USING RECOMMENDED COSTS AND 2012 SALES

DATA
PRODUCT (12 OZ)
SALES/WK
S=SETUP COST
D=ANNUAL DEMAND (CASES)
I=CARRYING COST
C=FULL COST/CASE
EOQ (OLD)
ROP (3 WEEKS)
% INCREASE IN SALES
% INCREASE IN EOQ
ROP (4 WEEKS)

3JS
74.40
37.5
3869
0.23
25.79
221
223
29%
43.00
%
298

MARRA
N
57.81
37.5
3006
0.23
27.97
187
173
29%
-43.00%
231

KERR
Y
37.88
37.5
1970
0.23
24.31
163
114
32%
42.00
%
152

DOM

AAA

23.29
37.5
1211
0.23
24.46
122
70
37%

16
37.5
832
0.23
23.77
107
48
33%

-41.00%
93

-42.00%
64

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