Roundtree Cannery is a medium-sized company which produces and distributes a variety of fruit and vegetable products under private brands in the north-central states. On Monday, September 14, 2009, Mr. Jackson, Vice-President of Operations, asked Ms. Adams, Controller, Mr. Owens, Vice President of Marketing, and Ms. Brandon, Vice President of Production, to meet with him to discuss the amount of cranberry products to pack this season. The cranberry crop, which had been purchased at planting, was beginning to arrive at the plant, and packing operations would have to be started by the following Monday. A total of 3,000,000 pounds had been purchased. Assume no waste.
At the meeting each person was given the Produce Inspection Report that contained the latest estimate of the quality of incoming cranberries. According to this report, about 20% of the crop will be Grade A quality and the remaining portion will be Grade B. Mr. Jackson asked Mr. Owens about the estimated demand for cranberry products for the coming year. Mr. Owens passed around the latest demand forecast (Exhibit 1-- Demand Forecasts: case selling price and number of cases demanded). While the forecast indicated that they could sell all of the whole canned cranberries they could produce, the expected demand for cranberry juice and jellied cranberry was limited. He reminded the group that the selling prices had been set in light of the long-term marketing strategy of the company and that the potential sales had been forecasted at these prices.
|Product||Selling Price per Case||Demand Forecast (Cases)|
|24 packages/case whole cranberries||$4.00||800,000|
|24 cans/case choice peach halves||$5.40||10,000|
|24 cans/case peach nectar||$4.60||5,000|
|24 bottles/case cranberry juice||$4.50||50,000|
|24 can/case cooking apples||$4.90||15,000|
|24 cans/case jelled cranberry sauce||$3.80||80,000|
Ms. Adams, after looking at the demand estimates, said that it appeared like the company should do quite well on the cranberry crop this year. With the new accounting system that had been set up, she had been able to compute the contribution for each product, and according to her analysis, the incremental contribution on whole cranberries was greater than the incremental contribution on any other cranberry product. In May, after Roundtree had signed contracts agreeing to purchase the grower=s production at an average delivered price of 6 cents per pound, Ms. Adams had computed the cranberry products= contributions shown in Exhibit 2 (Product Item Profitability by Case). Exhibit 2 was distributed to the officers at the meeting.
Product Item Profitability/Case
|Whole cranberries||Peach halves||Peach nectar||Cranberry juice||Cooking apples||Cranberry jellied|
|Variable selling cost||$.40||$30||$.40||$.85||$.28||$.38|
|Total Variable Costs||$3.60||$4.38||$4.20||$4.38||$2.80||$3.45|
|Less allocated overhead||$.28||$.70||$.52||$.21||$.75||$.23|
Product usage, in terms of pounds per case, is shown in Exhibit 3.
Exhibit 3. Product Usage
|Product||Pounds per Case|
|Jellied cranberry sauce||25|
Ms. Brandon brought to their attention that although there was ample production capacity, it was impossible to produce all whole cranberries since too small a portion of the cranberry crop was AA@ quality. Roundtree used a numerical scale to record the quality of both raw products and prepared products. This scale ran from zero to ten, the higher number representing better quality. According to this scale, AA@ cranberries average nine points per pound and AB@ cranberries average five points per pound. Ms. Brandon noted that the minimum average input quality was eight points per pound for whole cranberries and six points per pound for juice. Jellied cranberries could be made entirely from AB@ cranberries. This meant that the whole cranberry production was limited to 800,000 pounds.
Mr. Jackson stated that this was not a real limitation. He had been recently solicited to purchase 80,000 pounds of Grade A cranberries at $.085 per pound and at that time had turned down the offer. He felt, however, that the cranberries were still available.
a. Develop a model that can be used to maximize contribution (total sales less variable costs) with only the 3,000,000 pounds of cranberries.
b. Discuss whether the additional 80,000 pounds of Grade A cranberries should be purchased. Explain your decision.