La Jolla Beverage Products is considering producing a wine cooler that would be a blend of a white wine, a rose wine and fruit juice. To meet taste specifications, the wine cooler must consist of at least 20% white wine, at least 50% and no more than 60% rose, and exactly 10% fruit juice. La Jolla purchases the wine from local wineries and the fruit juice from a processing plant in San Francisco. For the current production period, 8,000 gallons of white wine and 7000 gallons of rose wine can be purchased; an unlimited amount of fruit juice can be ordered. The costs for the wine are $1 per gallon for the white and $2 per gallon for the rose; the fruit juice can be purchased for $0.50 per gallon. La Jolla Beverage Products can sell all of the wine cooler they can produce for $4 per gallon.
a. Is the cost of the wine and fruit juice a sunk cost or a relevant cost in this situation? Explain.
b. Formulate a linear program to determine the blend of the three ingredients that will maximize the total profit. Solve the linear program to determine the number of gallons of each ingredient La Jolla should purchase and the total profit contribution they will realize from this blend. Note: You shall use a software, either Management Scientist or Excel Solver, to solve this problem. Attach the software model and output (Answer and Sensitivity Analysis) to your homework submission.
c. If La Jolla could obtain additional amounts of the white wine, should they do so? If so, how much should they be willing to pay for each additional gallon, and how many additional gallons would they want to purchase?
d. If La Jolla Beverage Products could obtain additional amounts of the rose wine, should they do so? If so, how much should they be willing to pay for each additional gallon, and how many additional gallons would they want to purchase