Cadman Food Processors

Topics: Tomato, Costs, Tomato juice Pages: 14 (3980 words) Published: August 25, 2013
Managerial Data Analysis|
Cadman Food Processors|

Submitted To: Professor D. Cook
Submitted By: Group 3

Executive Summary

The VP of Operations of Cadman Foods faces the decision of having to allocate three million pounds of tomatoes to the production of canned whole tomatoes, tomato juice or tomato paste. Subsequent to that decision, the VP needs to determine whether to acquire 80,000 pounds of additional “A” quality tomatoes at $0.425 per pound. Bill Cooper, the Controller at Cadman Foods has recommended that Cadman produce the maximum quantity of canned whole tomatoes based on Dan Tuckers assessment of the tomato crop. By logical extrapolation, this would result in the remainder of the crop being allocated to the production of tomato paste. Charles Myers, the Sales Manager at Cadman has recommended that instead, 2/3 of the tomato crop be used in the production of tomato paste while the remaining crop should be used in the production of tomato juice. Mr. Meyers arrived at his recommendation based on cost ratio derived on the basis of quality of tomato crop and marginal profit.

The decision that Mr. Gordon and Cadman Foods faces is one that can be clearly solved when the situation it faces is broken down to the core and certain fundamentals are clearly understood. To make the analysis more palatable, it is important that two key elements are understood. The first is that the contribution margin must equal the difference between the selling price and the variable cost price not including the cost of tomato’s, and secondly the cost of the tomato crop is a sunk cost regardless of whether the cost is an average or a ratio based on quality. If any of the crop is not used, or if the costs of tomatoes was applied prior to optimizing production, not all the costs are captured in the analysis. This was one of the findings of our analysis and a key omission made by both Bill Cooper’s and Charles Myers strategies.

In defining our optimization analysis, we solved for maximized marginal profit on the basis of contribution per pound of tomato in each of the three product categories as per the equation below:

Marginal Profit=CAWUAW+CBWUBW+CAJUAJ+CBJUBJ + CAPUAP+CBPUBP- Cost of Tomato's

The decision variables we solved for were the pounds used of each quality of tomato in the production of whole, juice and paste products.

UAW ,UBW, UAJ, UBJ , UAP, UBP

All the constraints were defined in terms of the above aforementioned variables including minimum quality, demand and sell price of each product type. With the analysis optimized, production of tomato paste is maximized against demand (80,000 cases), while 15,000 cases of juice and 38,888 cases of whole tomatoes are produced for a marginal profit of $226,771.

If the additional crop of grade “A” tomatoes was still available to Mr. Gordon, our recommendation would be to purchase the crop. This would result in a reduction of tomato juice production by 2,000 cases with a corresponding increase in production of 6,667 cases of whole tomatoes, translating to an increase in marginal profit by $2,140. It would be worthwhile to purchase the additional 80,000 pounds of grade “A” tomatoes up to a purchase price of $0.45 a pound. Analysis

In the case of Cadman food processors, the Vice President of Cadman foods is provided two different strategies on how best to allocate the firm’s 3,000,000 pound crop in the production of whole canned tomatoes, tomato juice and tomato paste. In order to properly assess the situation and to make an educated decision, there are several important considerations that need to be kept in mind.

1. Only 600,000 pounds are of grade “A” quality
2. Tomatoes are assigned a score of 9 for “A” quality tomatoes and 5 for “B” Tomatoes 3. Canned tomatoes require a minimum average score of 8, juice 6 and paste has no minimum 4. The demand forecast of each product type is considered the absolute limit 5. Unused tomato crop...
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