Question

Exercise 4.22 Riverbed Inc. produces organic cranberry juice from cranberries it farmed. Unfortunately, it has been a bad year for cranberries because of severe cold weather. Riverbed has only 8,700 litres of juice. It usually sells 14,300 litres at $3.10 per litre. The variable costs of farming the cranberries are $0.95 per litre. Riverbed has loyal customers, but its managers are worried that the company will lose customers if it does not have juice available for sale when people stop by the farm. A neighbour is willing to sell 5,600 litres of extra cranberry juice at $3.00 per litre. (b) Using the general decision rule, what is the most per litre that Riverbed's managers would be willing to pay for additional juice? (Round all entries to 2 decimal places, e.g. 1.25.) Managers would be willing to pay up to a

Answer 1

The managers are worried that they will lose customers if the juice is not available when people stop by the farm. So the intention of the managers is to meet the demand of the customer and not make profits. The maximum price for which the managers are willing to buy from neighbour should be the price for which they sell juice to the customer. Here the managers do not intend to make profits but to meet the demand of the customer so the cost per litre will be equal to selling price per litre.

Selling price = Purchase cost

$3.10 is the purchase cost per litre of juice.

The Maximum price the manages would be willing to pay for extra juice is $3.10 per litre.