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Case Study Forsters Market

Questions:
1.

What are the two capacity options that Robbie needs to consider?
What are their fixed and variable costs?
What is the indifference point for the two options?
What are the implications of the indifference point?
Answers:
Make coffee vs Buy Coffee
Make: Fixed Cost = $35,000 Variable Cost = $1.60/lbs.
Buy: Fixed Cost = $0
Variable Cost = $3.00/lbs.
Indifference point: $35,000 + $1.6 x (lbs. Coffee) = $0 + $3.0 x (lbs. Coffee)
25,000 lbs. of coffee is indifference point
Demand would have to be at the high level (greater than 25,000 lbs.) continually in order to reap the value of investing in a
roaster.

2.

Draw the decision tree for the roaster decision.


If Foresters does not invest in the roaster, does Robbie need to worry about the different demand scenarios outlined
above?
Why or why not?

No. Forsters will continue to make a profit at any demand level by not investing in a roaster. They could possibly reduce the
$3 cost by buying in bulk during high demand.
3.

Calculate the expected value for the two capacity options. Keep in mind that, for the roster option, any demand above
14,400 pounds will generate revenue of only $2.90 a pound.
Update the decision tree to show your results.

4.

What is the worst possible financial outcome for Forsters?


The best possible financial outcome?
What other factors, core competency, strategic flexibility, etc, should Robbie consider when making this decision?
Answers:
The worst possible outcome for Robbie is choosing high demand because he will lose profit but if he picks medium demand
it balances out by 75000 which makes it an equal outcome. The best outcome would be low demand because he would
make $9800 profit but it would be for the best if he keeps on buying from the local supplier instead of buying an industrial
size coffee roaster.
Other factors that should be considered:
Potential growth rate, infrastructure, competition and supply & demand