Case Study: Forster’s Market
1. There are two capacity options that Robbie needs to consider. One is buying coffee from a local supplier for $3 per pound and then sells it for $7 per pound. The other is buying a large industrial size coffee roaster that cab roast up to 40,000 pounds per year. By roasting the coffee himself, Robbie will be able to cut his coffee costs down to 1.60 a pound. The drawback is that the roaster is that the coffee roaster will be quite expensive fixed costs (including the lease power training and additional labor) will run about 35,000 a year.
Not to Buy TC2= 0 + 3 (18000) = $54000
Buy TC1= 35000 + 1.6 (18000) = $63800
Not to Buy TC2 = FC + VC TC2 = 0 + 3 (25000) = $75000
Buy TC1= FC + VC TC2 = 35000 + 1.6(25000) = $75000
Not to Buy TC2 =0 + 3(35000) = $105000
Buy TC1 = 35000 + 1.6(35000) = $91000
By looking at all the demands the best investment for Robbie would be not to buy roaster because profits are very low and he could end up losing money and risk bankruptcy if he chooses to buy the roaster.
4. The worst possible outcome for Robbie is choosing high demand because he will lose profit but if he picks medium demand it balances out by 75000 which makes it a equal outcome. The best outcome would be low demand because he would make $9800 profit but it would be for the best if he keeps on buying from the local supplier instead of buying a industrial size coffee roaster.