At the Hilton Applefest and Trade Expo, James Jones, owner of Jones Orchard, saw a sign displayed in front of a vendor’s booth: I can get you pesticides at $10.00 a gallon—guaranteed in writing! Over a one-year period, the vendor guarantees delivery of between 350,000 and 500,000 gallons of pesticide at a maximum price of $10 per gallon. Since Jones Orchard is currently paying $11.30 per gallon, the offer is appealing. However, Jones uses only 25,000 gallons and the annual management fee for this service is a whopping $275,000.
The only way Jones can see to make the offer work is to form a buying consortium with other farmers. As long as all of the farmers are located within 10 square miles, the vendor is willing to allow the formation of a consortium. Including Jones Orchard, five farms are within this area. Their pesticide needs and anticipated costs are as follows:
| Gallons | Price per Gallon | |
| Jones | 25,000 | $11.30 |
| Gilbert | 35,000 | 11.20 |
| Santos | 50,000 | 11.12 |
| Singh | 100,000 | 10.90 |
| Chen | 150,000 | 10.70 |
| Total | 360,000 |
All of the farmers are willing to participate in the buying consortium as long as there is an anticipated cost savings for each farmer. Everyone agrees that each farmer should pay the same amount for materials. But allocation of the management fee is left entirely up to Jones.
Required:
a. Based upon the numbers provided, demonstrate that this consortium could work.
b. Jones initially considers allocating the management fee either (i) equally between all members or (ii) based upon each farmer’s percentage of total gallons needed. Would either method work? Show allocation by each method.
c. Jones believes it would make sense to allocate the management fee on an ability-to-pay basis. As the chapter allocates joint costs based upon net realizable value, allocate the management fee based upon the potential dollar savings opportunity of each farm. Is this method feasible?
d. Consider the issue of private versus public information as it relates to the cost allocation schemes presented in this problem. Address whether the information required to implement each scheme is essentially held in common by all of the farmers in the consortium or privately held by each individual farmer. In particular, given that the consortium will allocate the management fee by ability to pay, how might each farmer’s privately held cost information serve to undermine the consortium’s future existence?
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