Case Study Red Brand Canners

Topics: Cost, Tomato, Costs Pages: 5 (1254 words) Published: October 12, 2012

On Monday, November 15th, 2004, Mitchell Gordon, Vice-President of Operations, asked the Controller, the Sales Manager, and the Production Manager of Red Brand Canners to meet with him to discuss the amount of tomato products to pack that season. The tomato crop, which had been purchased at planting, was beginning to arrive at the cannery. Packing operations would have to start by the following Monday because, after this time the fruit would begin to deteriorate. In effect this ruled out the possibility of reselling any part of the crop which, if it remained unpacked, would be worthless. Red Brand was a medium-size company which canned and distributed a variety of fruit and vegetable products under private brand names in the western states. William Cooper, Controller, and Charles Myers, Sales Manager, were the first to arrive in Mr. Gordon’s office. Dan Tucker, Production Manager, came in a few minutes later and said that he ha d picked up Produce Inspection’s latest estimate of the quality of the incoming tomatoes. According to the report, about 25 per cent of the 7,000,000 pound crop was Grade ‘A’ and the remaining portion Grade ‘B’. Mr. Gordon asked Mr. Myers about the demand for tomato products for the coming year. Mr. Myers replied that they could sell all of the whole canned tomatoes Type A and Type B they could produce. The expected demand for tomato juice and tomato paste, however, was limited. The Sales Manager then passed around the latest demand forecast (Exhibit 1) reminding the group that selling prices had been set in light of long-term marketing strategy of the company, and that potential sales had been forecast at these prices. After looking at Mr. Myer’s estimates of demand, Mr. Cooper said that it looked as though the company “should do quite well (on the tomato crop) this year”. With the new accounting system that had been set up, he had been able to compute the contribution for each product, and according to his analysis the incremental profit on whole tomatoes was greater than for any other tomato product. In May, after Red Brand signed contracts agreeing to purchase the grower’s production at an average delivered price of 9 cents per pound, Mr. Cooper had computed the tomato products’ contributions (Exhibit 2).


Exhibit 1 Red Brand Canners Demand Forecasts


Selling Price per Case

Demand Forecast (Cases)

24-2.5 whole tomatoes A 24-2.5 whole tomatoes B 24-2.5 choice peach halves 24-2.5 peach nectar 24-2.5 tomato juice 24-2.5 cooking apples 24-2.5 tomato paste

€6.00 €4.50 €5.50 €4.60 €5.60 €4.90 €4.70

200,000 600,000 10,000 50,000 100,000 150,000 100,000

Mr. Tucker called Mr. Cooper’s attention to the fact that, although production capacity was ample, it was impossible to produce all whole tomatoes because too small a portion of the crop was ‘A’ quality. Red Brand used a numerical scale to record the quality of both raw produce and prepared products. This scale ran from zero to ten, the higher number representing better quality. ‘A’ tomatoes averaged 10 points per pound and ‘B’ tomatoes five points per pound. Mr. Tucker noted that the minimum average input quality for canned whole tomatoes Type A was ten, for juice was seven and for paste was six points per pound1.* Whole canned tomatoes Type B could be made entirely from ‘B’ grade tomatoes. Mr. Gordon stated that this was not a real limitation. Recently solicited to purchase 100,000 pounds of Grade ‘A’ tomatoes at 9.50 cents per pound he had turned down the offer. He felt, however, that the tomatoes were still available. Mr. Myers, who had been doing some calculations, said that although he agreed that the Company “should do quite well this year”, it would not be by canning whole tomatoes. It seemed to him that tomato costs should be allocated on the basis of quality and quantity rather than by quantity only, as Mr. Cooper had done. Therefore, he had recomputed the material profit on this basis...
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