Background

Amore Frozen Foods produces 8-ounce frozen macaroni and cheese pie in its production facility

in Cortland, New York. The company produces 60,000 dozen pies each month. Pies are sold at a

wholesale price of $4.50 per dozen, $1.50 above the $3.00 standard cost per dozen. The line is

staffed with 25 workers making $6 an hour. Amore had been filling each aluminum tin to a high

target fill rate of 8.44 to avoid the fines levied by FDA due to underweight products. The fines

assessed are up to $15 for each 8 ounce pie.

According to FDA requirements, an inspector, employed by Amore, weighs 5 pies on the line

every 20 minutes by using FDA approved weight control system. The inspector is payed close to

$12 an hour with fringe benefits. Moreover, FDA-approved system required formal action if the

sample average weight fell below 8 ounces. If the sample average weight fell below 8 ounces,

the entire 20 minute production line was usually sold to the company operated Thrift Store.

Underweight pies labeled as 7-ouncs are sold at $3.60 per dozen. The local demand is estimated

to be 60 dozen each week. No more than 1,000 dozen pies can be stored in inventory.

The Problem

Tom Jenkins, a manager of Quality Services thinks the fill target for Amores 8-ounce frozen

macaroni and cheese pie should be set to 8.22 ounces. It is currently set at 8.44 ounces to avoid

possible fines resulting from the dehydration of frozen macaroni and cheese caused by improper

storage.

In addition, there is a limited storage space for underweight macaroni and cheese pies filtered out

by Amores quality inspection. Only 1,000 dozen pies can be stored at one time and the demand

is only 3120 pies per year. (Appendix-Figure 2.0). The 8.44 ounce target fill amount increases
the costs of productions while minimizing the rejection rate. However, this higher fill rate exerts

a negative an impact on its profitability.

Objective

The key objective is to set a fill target that would maximize profit and minimize waste.

The solution:

Although the standard deviation of normally distributed fill amounts around the target value is

stated to be at .22 ounce, the Example weight control report says that the standard deviation of

target fill rate 8.44 is .205 (Appendix Figure-1.1). Based on the calculation, the mean fill rate is

estimated to be 8.4928 with a standard error of .02367(Appendix-Figure-1.2). In order to avoid

the possible fines arising from the dehydration of frozen macaron and cheese due to improper

storage, Amore increased the fill rate to 8.44, generating huge amount of waste. The 2 standard

deviation above the required amount increases the expenditures on raw materials while

minimizing the risk of rejection. However, there could be an optimum fill rate somewhere

between 8.22 and 8.44 that can maximize the profit without generating much waste. Besides, the

data in the report clearly state that productivity results are normally distributed as kurtosis and

skewness fall between -1 and 1.

Using the data given in the Example weight control report, we have calculated the z value. The z

value has been used to find out the probability of acceptance rate and rejection rate at the target

fill rate.

As we have multiple samples and want to describe the standard deviation of those sample , we

used the following Z score formula.

Z=(X Mean) / (Standard deviation / sample size)

[Where X = target fill rate, Mean = 8, Standard deviation = 0.205, Sample size = 5]
 Total Revenue under different target fill rates:

Target Acceptance Reject Rejec Accepte Thrift Total

Fill Z Score rate Rate t d Market Store Revenue
6062. 321271
8.22 2.3996 0.9916 0.00842 4 713937.6 9 11232 3223951.2
323825
8.3 3.2722 0.9995 0.00054 388.8 719611.2 0 1399.68 3239650.08
323977
8.35 3.8176 0.9999 0.00007 50.4 719949.6 3 0 3239773.20
324000
8.4 4.3629 1.0000 0.00000 0 720000 0 0 3240000
324000
8.44 4.7992 1.0000 0.00000 0 720000 0 0 3240000

We followed a trial and error process in order to find the optimal target fill rate that generates the

higher revenue as well as the higher profit. At first, we calculated the z score using the

previously stated formula. We used the normal distribution table (Appendix-Figure 3.0) to find

out the probability of filling amount that is above 8.

To find out the total costs we used the standard cost break down given in the case. Based on the

variable and fixed costs given for 8.44 ounce target, we have calculated the proportional costs for

different fill targets.

Total Profit under different fill rates:

Target Fill
Total
Rate VC FC Cost Profit
Revenue
8.22 3223951.2 1276243 849600 2125843 1098109
8.3 3239650.08 1288664 849600 2138264 1101387
8.35 3239773.2 1296427 849600 2146027 1093747
8.4 3240000 1304190 849600 2153790 1086210
8.44 3240000 1310400 849600 2160000 1080000

Alternative 1: If our target fill rate is 8.22, we find that 99.16% of pies have weight more than

8.00 ounces. At this fill rate we get 713937.6 number of pies that can be sold at $4.50. The
rejected pies are sold at Thrift store at the price of $3.6. As the company cannot sell more than 60

dozens per week, the Thrift store sales for target fill 8.22 will be 3120 number of pies in a year.

As the rejected number of pies is more than the demand, the unsold pies will be donated. Total

revenue generated from the market and thrift store combined amounts to $3223951.2. Thus the

total profit, after deducting the total costs, reached at $1098109.

Alternative 2: Using the same calculation method as shown in the table, the acceptance rate for

target fill rate 8.30 is 99.95%. This target fill rate says that only 0.054% of the pies will be

rejected, generating the highest amount of profit. As the number of pies sold at market price of

$4.5 is higher, the total revenue for this fill rate amounts to $3239650.08, generating the highest

amount of profit.

Alternative 3: At the target fill rate of 8.35, the acceptance rate is higher than the previous two.

However, due to higher fill rate total variable costs rises. The variable costs are proportional to

the amount of pies allotted in a unit. Despite having higher acceptance rate, the amount of profit

at this fill rate is lower than the fill rate of 8.30.

Recommendation:

Based on the observation, it can be concluded that maximum amount of profit is generated at

8.30 ounce target fill rate. This fill rate balances between the total costs and acceptance rate. As

we increase the target fill rate from the optimal 8.30, the variable costs start rising, minimizing

the total profit.

Using the target fill rate 8.30 instead of 8.44 minimizes the variable costs by $21,736. Compared

to 8.44 fill target, the target amount 8.30 saves extra 1012 dozens which generates an additional

income of $4554. By setting this target, company can also avoid potential fines as it has

acceptance rate of 99.94%.

Thus, we recommend that Amore Frozen Foods set the target fill rate at 8.30 instead of existing

rate 8.44.

Figure 2.0

The facility produces 60,000 dozens a month

o 60,000 * 12 = 720,000 dozens per year
o ((720,000*12)*12)/24= 360,000 cases per year
The thrift stores demand is limited to 60 dozen per week.
o 60 * 52 = 3120 demand per year
o 3.60 * 60 = $216 revenue per week
o 216 * 52 = $11232 per year
o Can store up to 1,000 dozen pies at a time, regardless of actual
demand (60 per week)