Question

Forster’s Market is a retailer of specialty food items, including premium coffees, imported

crackers and cheeses, and the like. Last year Forster’s sold 14,400 pounds of coffee. Forster’s pays a

local supplier $3 per pound and then sells the coffees for $7 a pound.

The Roaster Decision

While Forster’s makes a handsome profit on the coffee business, owner Robbie Forster thinks he

can do better. Specifically, Robbie is considering investing in a large industrial-sized coffee roaster that

can roast up to 40,000 pounds per year. By roasting the coffee himself, Robbie will be able to cut his

coffee costs to $1.60 a pound. The drawback is that the roaster will be quite expensive; fixed costs

(including the lease, power, training, and additional labor) will run about $35,000 a year.

The roaster capacity will also be significantly more than the 14,400 pounds that Forster’s needs.

However, Robbie thinks he will be able to sell coffee to area restaurants and coffee shops for $2.90 a

pound. Robbie has outlined three possible demand scenarios:

Low demand (33.33% probability)	18,000 pounds per year
Medium demand (33.33% probability)	25,000 pounds per year
High demand (33.33% probability)	35,000 pounds per year

These numbers include the 14,400 pounds sold at Forster’s Market.

Questions

1. Fill out the table below with the two capacity options information:

Capacity option	Fixed Cost	Variable Cost
1.
2.

2. What is the indifference point for the two options (show your calculation for full credit)?

Answer:

3. What are the implications of the indifference point?

Answer:

4. If Forster’s does not invest in the roaster, does Robbie need to worry about the different

demand scenarios outlined above? Why or why not?

Answer:

5. Calculate the expected profit (revenue minus cost) for the two capacity options (show your calculation for full credit). Keep in mind that, for the roaster option, any demand above 14,400 pounds will generate revenues of only $2.90 a pound.

Answer:

6. Draw the decision tree to show your results.

Answer:

7. What is the worst possible financial outcome for Forster’s?

Answer:

8. What is the best possible financial outcome?

Answer:

9. What other factors—such as core competency, strategic flexibility, etc.—should Robbie consider

when making this decision?

Answer:

10. What do you think the company should do, and why?

Answer:

Answer 1

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