Case: Kootenay Straw Broom Company
The Kootenay Straw Broom Company, located in British Columbia, Canada, is a small, family-run business that handmakes two models of straw brooms, the Pioneer and the Heritage models, which are sold in "country stores" throughout Canada and the northwestern United States. Given its current production capacity and selling price, Kootenay is able to sell all the brooms it produces. The Pioneer model is the company's basic model. It consists of a plain wooden handle, utilizes one pound of straw, and takes an average of 15 minutes (.25 hour) to make. Kootenay sells them for $12.75 each. The Heritage model is the company's deluxe model. Although the same wooden handles are used, they are run through a decorative lathe and attached to a larger base consisting of 1.5 pounds of straw. These two factors increase the production time of the I leritage broom to 24 minutes (.40 hour), and Kootenay sells them for $18 each. Kootenay receives daily deliveries of straw that is specially treated for their brooms from Tyler Farms. Tyler can supply Kootenay with up to 350 pounds daily of the specially treated straw. This straw costs Kootenay $1.50 per pound. Kootenay purchases its handles from Adhor Mills, which manufactures the handles according to Kootenay's specifications. Adhor Mills is a two-hour drive from Kootenay. It currently makes only one daily delivery to Kootenay in a truck capable of hauling 30 boxes of 10 handles each (or 300 handles). Adhor charges Kootenay $7.50 per box of 10 for manufacture and delivery of the handles. Adhor also makes a major delivery of products to a town 45 miles from Kootenay and has offered to swing by Kootenay with one additional box of 10 handles. However, the added expense for making this detour means that Kootenay would have to pay Adhor $2 5 for this extra box of 10 handles. Kootenay averages 80 production hours per day. $ince Kootenay is a family-run business, it considers the daily cost of $2800 for its overhead and "family labor" of its 10 members as sunk costs required for the business. Kootenay is ready to consider several options that could increase the daily profit:
1. Seeking additional sources for treated straw
2. Taking Adhor Mills up on its offer to deliver an extra box of handles (for $25)
3. Adding a half-time worker (four hours per day) for $50 per day
Prepare a report for the Kootenay Straw Broom Company that evaluates the option or set of options it should implement. The report should:
1. Recommend an optimal production under current conditions.
2. Include a summary of the determination of unit profits of $10.50 and $15.00, respectively, for the Pioneer and Heritage broom models, showing that the costs of both treated straw and broom handles are included in these calculations.
3. Show that after subtracting fixed costs, the business nets $500 per day.
4. Give a brief analysis of the sensitivity of the objective function coefficients.
5. Analyze the options using the correct interpretation of the shadow prices considering which costs are included and which costs are sunk. (Remember: Do not call them shadow prices in the report.)