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Red Brand Canners

And Monday, September 13, 1965, Mr. Michael Gordon, Vice President of operations,ased the !ontroller "illiam !ooper, the Sales Mana#er !harles Myers, and $an %&certhe Prod&ction Mana#er to meet 'ith him to disc&ss the amo&nt of tomato prod&cts topac that season. %he tomato crop, 'hich had been p&rchased at plantin#, 'as be#innin#to arri(e at the cannery, and pacin# operations 'o&ld ha(e to be started by the follo'in#Monday. )ed *rand !anners +)*! 'as a medi&m-sie company that canned anddistrib&ted a (ariety of fr&it and (e#etable prod&cts &nder pri(ate brands in the 'esternstates.

!ooper and Myers 'ere the first to arri(e in Mr. Gordon/s office. %he prod&ctionmana#er came in a fe' min&tes later and said that he had piced &p prod&ce inspection/slatest estimate of the 0&ality of the incomin# tomatoes. Accordin# to their report, abo&t2 of the crop 'as #rade 4A/ 0&ality and the remainin# portion of the 3 million po&ndcrop 'as #rade 4*/.

Gordon ased Myers abo&t the demand for tomato prod&cts for the comin# year. Myersreplied that they co&ld sell all of the 'hole canned tomatoes they co&ld prod&ce. %heepected demand for tomato &ice and tomato paste, on the other hand, 'as limited. %hesales mana#er then passed aro&nd the latest demand forecasts, 'hich is sho'n in7hibit 1. 8e reminded the #ro&p that the sellin# price has been set in li#ht of the lon#-term maretin# strate#y of the company, and potential sales ha(e been forecasted at theseprices.

*ill !ooper, after looin# at Myers/ estimates of demand said that it looed lie thecompany sho&ld do 0&ite 'ell on the tomato crop this year.: "ith the ne' acco&ntin#

system that had been set &p, he has been able to comp&te the contrib&tion for eachprod&cts, and accordin# to his analysis the incremental profit on the 'hole tomatoes 'as#reater than for any other tomato prod&cts. ;n May, after )*! had si#ned contractsa#reein# to p&rchase the #ro'er/s prod&ction at an a(era#e deli(ered price of

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Myers, 'ho had been doin# some calc&lations, said that althoh he a#reed that thecompany sho&ld do 0&ite 'ell this year: it 'o&ld not be by cannin# 'hole tomatoes. ;tseemed to him that the tomato cost sho&ld be allocated based on 0&antity and 0&ality,rather than by 0&antity only as !ooper had done. %herefore, he re-comp&ted the mar#inal

profit on this basis +7hibit 3. >rom his res&lt, )*! sho&ld &se ,222,222 po&nds of the#rade 4*/ tomatoes for paste, and the remainin# ?22,222 po&nds of #rade 4*/ alon# 'ithall of the 622,222 po&nds of #rade 4A/ tomatoes for &ice.

Assignments

Answer the following questions:

1. "hy does %&cer state that the 'hole tomato prod&ction is limited to =22,222po&nds@ +i.e. 'here does the n&mber =22,222 come from@

. "hat is 'ron# 'ith !ooper/s s#estion to &se the entire crop for 'hole tomatoes@3. 8o' does Myers reach the concl&sion that the company sho&ld &se ,222,222 po&nds

of #rade 4*/ tomatoes for paste and the rest of the #rade 4*/ and #rade 4A: tomatoesto prod&ce &ice@ "hat is 'ron# 'ith Myers reasonin#@

Set up a linear programming model and solve it with Solver. Answer sensitivity

analysis questions:

?. "itho&t incl&din# the possibility of the additional p&rchases s#ested byGordon, form&late as an P the problem of determinin# the optimal cannin# policy.Bse the appropriate parameters from one of the ehibits sho'n belo'.

5. Ans'er the follo'in# 0&estions abo&t the optimal sol&tionCa. 8o' m&ch of each tomato #rade 'ill be &sed for the prod&ction of each

prod&ct@

b. 8o' m&ch of each prod&ct is prod&ced@c. "hat is the act&al a(era#e 0&ality per po&nd of the 'hole tomato and the&ice@

d. "hat is the net profit obtained after nettin# o&t the cost of the crop@6. Ans'er the follo'in# sensiti(ity analysis 0&estionsC

a. ;s additional p&rchase of &p to =2,222 po&nds of #rade 4A/ sho&ld be&ndertaen at a price of

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Exhibit 2: Cooper's product item profitability Whole Tomato Tomato

Product Tomatoes Juice Paste

Selling price $12 $13.50 $11.40

Variable costs:

Direct labor 3.54 3.! 1.!2

Variable OHD 0."2 1.0# 0."#Variable Selling 1.2 2.55 1.14

Packaging 2.1 1.5 2.31

Tomato 3.24 3.! 4.5

Total Variable costs 10.# 13.14 10.35

Contribution 1.2 0.3! 1.05

Less llocated OHD 0.#4 0.!3 0.!

!et Pro"it 0.3! 0.2" 0.3!

Exhibit 3: %yers' %ar&ial (alysisCalculating the actual cost o" grade ## and grade #$# tomatoes:

) * Cost per poud of '(' tomato i cets+ * Cost per poud of ',' tomato i cets

-1 !00/000)2/400/000+ * -3/000/000-1#cet

-25

D

9

E=

) * 2".! cets

+ * 15.54 cets

Whole Tomato Tomato

Product Tomatoes Juice Paste

Selling Price $12.00 $13.50 $11.40

Variable cost $".5! $.54 $5.#5%e&cluding Tomatocost'

4.44 3.! 5.53

Tomato cost $4.4" $3."2 $3.0

(arginal Pro"it -$0.03 $0.24 $1.!5

Exhibit 1: emad forecasts ad usa&e Demand Pound

Product )orecast %cases' per case

Whole Tomato #00/000 1#

Tomato Juice 50/000 20

Tomato Paste #0/000 25