How much ice cream should you produce in each batch

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Reference no: EM132289423

After your success in the t-shirt industry, you decide to start an ice cream empire. Your factory can produce your own ice cream at a rate of one serving per second at a cost of $0.50 per serving. Starting a production run costs $1000. Assume that the holding cost of ice cream is associated with cooling it ($0.01 per serving per minute in energy costs, which is surprisingly expensive) rather than opportunity costs; ingredients can be cooled for free. Demand for ice cream is a steady 30 servings per minute, all of which must be fulfilled.

(a) How much ice cream should you produce in each batch, and how long will a production run for a batch take?

(b) What should your maximum inventory level be?

(d) If you could slow your production rate down by a little, would it allow you to make more money or less money? Why (explain informally, rather than mathematically)?

(e) Assume that you could outsource your ice cream production instead. At what per-unit cost of outsourced ice cream does it begin to become cost-effective to outsource ice cream production (again, assume holding costs are only due to cooling; you, and not the producer, will be responsible for cooling once ice cream is delivered to you), if it costs $400 to set up each order? In other words, find the ‘break even point" between producing in house and outsourcing.

Reference no: EM132289423

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