Question

i need help with questions 1-10

Forster's Market Introduction 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 (Please use more space as needed in all of your answers) 1. Fill out the table below with the two capacity options information: Capacity option Fixed Cost Variable Cost 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:

Answer 1

Variable Conti 3 $1.60 16,0 35,000 6) the indifference point is volrone: Cost încurned in caption I lost immrmed in oftion 2 y (14,400x3) ( 25,000.) + 16x9 [quot of coffee (pouno) ] q. *5,1251 a) Tuplication: At this point, Forster is Indifferent between cloovue the two options - he can opt for either of the two. 4) No, he will not be wonice, as the lower liner of than is 18,000 which is higher the demand scenario 11,900 which he sells without the voprer- 1o Rexualow: 7*(11,400) – 3(11,400) = $167,600] su Forstow - 35,000 - 40,000 (1-6) + 704,400) + (16,000 - 44,400) PR (2.1)+(2,00 – 14, )(2-4) +(350D-4,*400) = $61,490|| dirba T-560 T2= 12,240 www Low middo. 42, 980 master high do = 1,02,720 7) Wover possible scenario woruld be wollen forstar fares a low demand and earys 12. 8) Boor possible outame would be wollen Foopter fares a high demand and canys 14

9) Other factors that Forster should consider include quality of the coffee, market trends in coffee consumption, competency and efficiency of his new roster (includes workers and machinery), etc

10) Depending upn the risk appetite, Forster should decide.

If he wants, highest return, he should go for the roster, but that has a 66.66% of failure (since P = 0.33)

If he wants safe and normal returns, he should not opt for the roster.