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8
CASE
TH E B A KER Y BREAD
P RO DUC TIO N PRO BLEM
Decision Support Using Excel
PREVIEW
A small-town bakery wants to plan its production to maximize profits. In this case, you will use the Excel Solver
to decide on the best mix of types of bread to produce.
PREPARATION
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Before attempting this case, you should review spreadsheet concepts discussed in class and/or your
textbook.
Complete any exercises that your instructor assigns.
Complete any part of Tutorial D that your instructor assigns, or refer to it as necessary.
Review file-saving procedures for Windows programs. These procedures are discussed in Tutorial C.
Refer to Tutorials E and F as necessary.
BACKGROUND
You own a bakery in your hometown. You have a small product line—bread and pastries, for the most part. Each
day you make three kinds of loaves of bread: rye, wheat, and pumpernickel. People love your fresh bread, and
you always sell out of your daily production, so you want to do a better job of production planning.
Your bakery is small and cannot be expanded. If you had more shelf space, you could make and sell more
bread, but you are limited to 300 feet of shelf space.
Up until now, you have just guessed at how many loaves of each type of bread you should bake each day.
However, you have heard that the Excel Solver can help you determine these daily amounts and maximize net
income, even though your shelf space is severely limited.
You sell a loaf of rye bread for $2.25, a loaf of wheat for $2.15, and a loaf of pumpernickel for $2.50. You
also know your variable expenses for each kind of bread—the cost of the ingredients, the cost of baking, and so
on. That means you can compute your profit margin on a loaf of each kind of bread (i.e., sales price less variable expenses).
You also know your fixed costs for baking bread every day. In other words, you know what your expenses
would be even if you made and sold no bread.
Your shelves are bolted to the wall, and are about 2 feet deep. A loaf of bread is laid on the shelf so that its
length is perpendicular to the wall. Thus, customers see the end of the loaves as they look at the shelves. For
example, a loaf of pumpernickel takes up 60 percent of a foot as it sits on the shelf. So, if 10 loaves of pumpernickel were laid out on the shelf, they would take up 10 * 0.6 = 6 feet of linear shelf space. You never put a loaf
of bread on top of another; each loaf actually sits on the shelf. Assume that you lay out all your day’s production at once.
You want to have a balanced bread inventory, so you feel that you must make (and sell) at least a certain
number of loaves of rye, wheat, and pumpernickel bread each day. You do not want to overdo any one kind of
bread, so you feel that you should also have daily production maximums for each.
Your oven and your productive capacity have a limit. You have never been able to produce more than
380 loaves of bread in a day, so you think that is a practical limit on total daily production.
You are profitable and want to stay profitable. You have a target minimum ratio of net income after taxes
to total bread revenue.
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Taxes are charged on pre-tax profits at the rate of 28 percent, but no taxes are paid on pre-tax losses. If pretax profits are negative, income tax expense is zero.
You want the Solver to tell you how many loaves of each type of bread to produce in a day. You want to maximize net income after taxes, subject to the constraints specified.
More Data about the Problem
One loaf of various types of bread take up the following amounts of space as they sit on the shelf:
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Rye—9 inches, or 75 percent of a foot
Wheat—90 percent of a foot
Pumpernickel—60 percent of a foot
You sell a loaf of rye bread for $2.25, a loaf of wheat for $2.15, and a loaf of pumpernickel for $2.50. Your
variable expenses per loaf for each type are: rye, $1.25; wheat, $1.15; pumpernickel, $1.60. For example, it
costs you $1.25 out of pocket to make a loaf of rye, but you get two dollars and a quarter each time you sell a
loaf of rye bread. The actual cost of ingredients is shown in Figure 8-1. This mix is important because the cost
of flour is slated to rise dramatically over the next year.
Rye (dollars)
Pumpernickel (dollars)
Wheat (dollars)
Yeast
.10
.10
.10
Molasses
.10
.10
Bread flour
.50
.50
Rye flour
.45
.45
Salt
.05
.05
.05
Oil
.05
.05
.05
Milk
.05
.05
Cornmeal
.10
Brown sugar
.20
.85
Honey
FIGURE 8-1
.05
Cost of bread ingredients
The bread-making side of your business has fixed costs of $100 a day. These expenses would rise even if
you made and sold no loaves of bread.
You want to have a balanced bread inventory, so you feel that you must make and sell at least 100 loaves
of rye, 100 loaves of wheat, and 50 loaves of pumpernickel each day. You do not want to overdo any one kind,
so you decide not to produce more than 300 loaves of rye, 300 loaves of wheat, or 150 loaves of pumpernickel a day. These requirements are shown in Figure 8-2.
Minimum production
Maximum production
Rye
100
300
Wheat
100
300
Pumpernickel
50
150
FIGURE 8-2
Minimum and maximum production
You want to stay profitable. You feel that your ratio of net income to total bread revenue should be at least 0.15.
With the future price of flour rising, you’re thinking of different ways to increase your profits. One idea that
intrigues you is to open a small sandwich shop across the street. The business that currently occupies the shop has
Case 8
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gone into bankruptcy and is closing. You have an opportunity to take it over, if the banker will lend you the money
to get started. Using your famous bread recipes, you could offer fantastic sandwiches for lunch.
Using your knowledge of Excel and the Solver, you decide to plan your bread production. You’ll model two
situations. The first uses the basic cost for the bread, as described in Figure 8-1 (the base case). The second situation models the future, where the price of flour is expected to rise 25 percent (the extension case). Comparing
the results of the two cases will help you plan your future production and justify your requests to the banker.
ASSIGNMENT 1: CREATING A SPREADSHEET FOR
DECISION SUPPORT
In this assignment, you will produce a spreadsheet that models the business decision. In Assignment 1A, you
will create a Solver spreadsheet to model the base case. In Assignment 1B, you will create a Solver spreadsheet to model the extension case. In Assignment 2, you will use the spreadsheet models to develop the information needed to recommend a production plan to your baker, and then you will document your
recommendations in a memorandum to the banker. In Assignment 3, you will give your recommendations in
an oral presentation.
First, you must create the spreadsheet models of the decision. Your spreadsheets should have the following sections:
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Changing Cells
Constants
Calculations
Income Statement
Your Solver spreadsheets will also include the decision constraints.
A base case spreadsheet skeleton is available to you, so you do not need to type in the skeleton. To access
the spreadsheet skeleton, go to your data files, select Case 8, and then select BAKERY1.xlsx.
Assignment 1A: Creating the Spreadsheet for the Base Case
You will model the bakery shelf space problem described in the Background section. Your model, when run,
will tell your baker how many loaves of each kind of bread to bake.
A discussion of each spreadsheet section follows. For each section, you will learn (1) how the section should
be set up, and (2) the logic of the sections’ cell formulas.
Changing Cells Section
Your spreadsheet should have the changing cells shown in Figure 8-3.
FIGURE 8-3
Changing Cells section
In this section, you ask the Solver model to compute how many loaves of each kind of bread to make in
a day. Start with a “1” in each cell. The Solver will change each “1” as it computes the answer. Of course, a
fraction of a loaf cannot be made.
Constants Section
Your spreadsheet should have the constants shown in Figure 8-4. An explanation of the line items follows the figure.
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Total shelf space available—You have 300 linear feet of shelf space.
Tax rate—Positive pre-tax net income is taxed at 28 percent, but no taxes are charged on pretax losses.
Selling Prices, per loaf—The selling price of each kind of loaf.
Variable Costs, per loaf—The variable (direct) cost of making a loaf of each kind of bread.
The Bakery Bread Production Problem
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FIGURE 8-4
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Constants section
Min Production—The minimum number of loaves to make each day for each kind of bread.
Max Production—The maximum number of loaves to make each day for each kind of bread.
Fixed Costs (day)—The daily expenses that would be incurred with no production.
Net Income to Revenue ratio target—The ratio of net income after taxes to total revenue should
be at least 0.15.
Shelf space used per loaf—The shelf space for each kind of loaf.
Max Loaves that could be made, all types—You cannot make more than 380 loaves in a day.
Calculations Section
Your spreadsheet should calculate the amounts shown in Figure 8-5. They will be used in the Income Statement section and/or the constraints. Calculated values are based on changing cell values, constants, and/or
other calculated values. An explanation of the line items follows the figure.
FIGURE 8-5
Case 8
Calculations section
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Net Income to Revenue ratio—The ratio of net income after taxes to total revenue.
Total Shelf space used—A function of the number of each type of loaf made and the shelf space
taken up by each.
Revenue from selling—A function of the number of loaves of each type made and the selling price
of each.
Variable Costs from selling—A function of the number of loaves of each type made and the direct
(variable) cost of each.
Total # of loaves produced, day—The total number of all three types of loaves produced in a day.
Income Statement Section
Compute the bakery’s net income after taxes, as shown in Figure 8-6. This statement shows net income for
the bakery for one day. An explanation of the line items follows the figure.
FIGURE 8-6
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Income Statement section
Revenue, all loaves—The sum of the revenue for each kind of loaf.
Variable Costs, all loaves—The sum of the variable (direct) costs for each kind of loaf.
Fixed Costs—The cost of operations even if no loaves are made and sold. The value is a constant.
Total Costs—The sum of variable and fixed costs.
Pre-Tax revenue—The difference between total revenue and total costs.
Income tax expense—Taxes are zero if pre-tax revenue is less than zero. Otherwise, apply the
income tax rate to pre-tax revenue to compute income tax expense.
Net Income—The difference between pre-tax revenue and income tax expense. Your goal is to
maximize this value.
Constraints and Running the Solver
In this part of the assignment, you determine the decision constraints for the spreadsheet. Enter the base case
decision constraints using the Solver. Run the Solver; when it reports that a solution has been found that satisfies the constraints, ask for an Answer Report.
When you finish, print the entire workbook, including the Answer Report sheet. Then, to prepare for the
extension case, use the Office button/Save As option to make a new spreadsheet file. (BAKERY2.xlsx would
be a good name.)
Assignment 1B: Creating the Spreadsheet for the Extension Case
Flour prices are rising fast. You figure that the prices of all types of flour (both bread flour and rye flour) will
rise 25 percent. In this extension case, you’ll model this price increase.
Your goals are to maximize net income. Change the price of bread flour and rye flour by increasing each
by 25 percent. Because this increase is quite high, you’re willing to drop the minimum constraint on making the loaves. In other words, you will bake any number of types of loaves to maximize income. Keep in mind
that you need to make complete loaves; you cannot make a portion of a loaf of bread.
Modify the extension case spreadsheet and related constraints to reflect this way of thinking about the bakery production problem. Run the Solver. Ask for an Answer Report when the Solver reports that a solution has
been found that satisfies the constraints. When you finish, print the entire workbook, including the Answer
Report. Save the file when you finish, close the file, and exit Excel.
The Bakery Bread Production Problem
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ASSIGNMENT 2: USING THE SPREADSHEET FOR
DECISION SUPPORT
You have built the base case and extension case models because you want to know the profitability of each
case and the number of loaves to bake. You will now complete your work by (1) using the worksheets and
Answer Reports to gather data, and (2) documenting your analysis and recommendations in a memorandum.
Assignment 2A: Using the Spreadsheets to Gather Data
146
You have printed the spreadsheet and Answer Report for each case so you can see the results of each scenario.
The bank would like to know how the net income differs in each case, so it can predict the profitability of your
business in the future. The bank also wants to know the mix of product for each case—in other words, the
number of each type of loaf.
The banker says that if net income drops more than 10 percent from the base case with the increased cost
of the flour ingredients, the bank cannot fund the sandwich shop expansion.
You should summarize the key data in a table that will be included in your memorandum. The form of this
table is shown in Figure 8-7.
Base case
Extension case
Number of rye loaves
Number of wheat loaves
Number of pumpernickel loaves
Net income after taxes
FIGURE 8-7
Format of table to insert into memorandum
The Answer Reports and worksheet changing cells show the number of loaves baked for each type of bread.
You can find the net income after taxes in the Answer Reports and worksheets.
Assignment 2B: Documenting Your Recommendation in a Memorandum
Use Microsoft Word to write a brief memorandum to the banker about the results of your analysis. Observe
the following requirements:
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Your memorandum should be set up as discussed in Tutorial E.
You need not provide details about the background—the banker is aware of the increased flour
prices. Give the banker your recommendation.
Support the recommendation graphically by including a summary table in your Word memo, as
shown in Figure 8-7. Insert the table by following the procedure described in Tutorial E.
ASSIGNMENT 3: GIVING AN ORAL PRESENTATION
Your instructor may request that you present your analysis and recommendation in an oral presentation. If
so, assume that the banker has accepted your analysis and recommendation. He has asked you to give a presentation that explains your recommendation to the entire staff at the bank. Prepare to explain your analysis and recommendation to the group in 10 minutes or less. Use visual aids or handouts that you think are
appropriate. Tutorial F contains guidance on how to prepare and give an oral presentation.
DELIVERABLES
Assemble the following deliverables for your instructor:
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A printout of your memorandum
Spreadsheet printouts
Electronic media, such as a USB key, with your Word memorandum and Excel spreadsheet files,
if required
Staple the printouts together, with the memorandum on top.
Case 8