Forsters Market
Introduction
Low demand Medium demand High demand
18000 pounds per year 25000 pounds per year 35000 pounds per year
Forsters Market is a retailer of specialty food items including premium coffees imported crackers and cheeses and the like. Last year Forsters sold 14400 pounds of coffee. Forsters pays a local supplier $3 per pound and then sells the coffees for $7 a pound.
The Roaster Decision
While Forsters makes a handsome profit on the coffee business owner Robbie Forster thinks he can do better. Specifically Robbie is considering investing in a large indus- trial-sized coffee roaster that can roast up to 40000 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 (including the lease power training and additional labor) will run about $35000 a year.
The roaster capacity will also be significantly more than the 14400 pounds that Forsters needs. However Robbie thinks he will be able to sell coffee to area restaurants and coffee shops for $2.90 a pound. Robbie has outlined three possible demand scenarios:
Low demand 18000 pounds per year
Medium demand25000 pounds per year
High demand35000 pounds per year
These numbers include the 14400 pounds sold at For- sters Market. In addition Robbie thinks all three scenarios are equally likely.
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?
Drawthedecisiontreefortheroasterdecision.IfForstersdoes not invest in the roaster does Robbie need to worry about the different demand scenarios outlined earlier? Why or why not?
Calculate the expected value for the two capacity options. Keep in mind that for the roaster option any demand above 14400 pounds will generate revenues of only $2.90 a pound. Update the decision tree to show your results.
WhatistheworstpossiblefinancialoutcomeforForsters? The best possible financial outcome? What other factors core competency strategic flexibility etc.should Robbie consider when making this decision?
(not included questions about 350-400 words)