Question

CASE STUDY Forster's Market Low demand 18,000 pounds per year 25,000 pounds per year Introduction Forster's Market is a retailer of specialty food items, including premium coffees, imported crackers and cheeses, and the like. Last year, Forster's sold 14,400 pounds of coffee. Forster's pays a local supplier $3 per pound and then sells the coffees for $7 a pound Medium demand High demand 35,000 pounds per year These numbers include the 14,400 pounds sold at For ster's Market. In addition, Robbie thinks all three scenarios are equally likely The Roaster Decision Questions 1. What are the two capacity options that Robbie needs to consider? What are their fixed and variable costs? What is the indifference point for the two options? What are the implications of the indifference point? 2. Draw the decision tree for the roaster decision. If Forster's does not invest in the roaster, does Robbie need to worry about the different demand scenarios outlined above? While Forster's makes a handsome profit fee business, owner Robbie Forster thinks he can do bet- ter. Specifically, Robbie is considering investing in a large industrial-sized coffee roaster that can roast up to 40,000 pounds per year. By roasting the coffee himself, Robbie will be able to cut his coffee costs to $1.60 a pound. The drawback is that the roaster will be quite expensive; fixed costs (includ- ing the lease, power, training, and additional labor) will run about $35,000 every year The roaster capacity will also be significantly the 14,400 pounds that Forster's needs. However, Robbie thinks he will be able to sell coffee to area restaurants and cof on the cof- Why or why not? 3. Calculate the expected value for the two capacity options Keep in mind that, for the roaster option, any demand above 14,400 pounds will generate revenues of only $2.90 a pound. Update the decision tree to show your results. 4. What is the worst possible financial outcome for For ster's? The best possible financial outcome? What other factors core competency, strategic flexibility, etc. should Robbie consider when making this decision? more than fee shops for $2.90 a pound. Robbie has outlined three pos- sible demand scenarios

Answer 1

A) He should not invest in the roaster but continue to buy from suppliersNo fixed cost if he continues with this.

There will be a variable cost of $3 per pound.

b)Invest in the roaster

Fixed cost $35,000

Variable cost $1.6 per pound.

c)Indifference point for two options

3y =1.6y + 35000= 25, 000 pounds.

d)Implication of the indifference point

Indifference point is the coffee demand level of both the two options will lie on the same cost.

-If the cost is more than 2500 pounds then option one will be more profitable

-If the cost is less than 25000 pounds, then investing in the roaster (option two) will be more profitable.

2. If Robbie decides to not invest in the roaster he doesn’t have to worry about the projected demands. He has 100% demand outcome with 14,400 lbs. of coffee and can buy as much as he can sell.

Buy Roaster Demand outcome:

18,000 lbs. 33.33%

25,000 lbs. 33.33%

35,000 lbs. 33.33%-

Doesn’t buy Roaster Demand outcome:

14,400 lbs. 100%

3. Expected Value: Buying coffee from a supplier

14,400 * ($7 - $3) = $57,600

Expected value: Purchase Roaster

[14,400 * ($7 - $1.6)] + [3,600 x (2.9 - 1.6)] - $35,000 = $47,440

[14,400 * ($7 - $1.6)] + [10,600 x (2.9 - 1.6)] - $35,000 = $56,540

[14,400 * ($7 - $1.6)] + [20,600 x (2.9 - 1.6)] - $35,000 = $69,540

-Buy Roaster Demand outcome:

18,000. 33%. $47,440

25,000. 33%. $56,540

35,000. 33%. $69,540

Doesn’t buy Roaster  demand outcome:

14,400. 100%. $57,6004.

4. The worst possible outcome is that Robbie invests in the new toaster and demand only results in 18,000pounds, and in that case, he earns $ 47,440. The best possible result is that Robbie invests in the toasterand the demand is 35000 pounds, in whose case earns $ 69,540. However, if demand estimates arereasonably accurate, Robbie should make money regardless of the decision he makes.If you invest, it can increase its flexibility to produce and sell coffee. In addition, possibly this can makeyour business more competitive. On the other hand, it can limit your budget to invest in other thingsrelated to this business.