Forster’s Market Case Study

Kathryn Stacy

Fall 2020
Question One.) What are the two capacity options that Robbie needs to consider? Buying pre roasted
coffee vs roasting the coffee on his own. What are their fixed and variable cost? If he does not buy the
roaster then his fixed cost would zero and if he does buy the roaster his fixed cost would be $35,000.
The variable cost for not buying the roaster would be $3.00 and if he does buy the roaster the variable
cost would be $1.60. What is the indifference point for the two options? 25,000 is the indifference
point. What are the implications of the indifference point? Since the indifference point is higher than
the 14,400 that Robbie would use in house. This means that Robbie will have to sell roasted coffee to
the surrounding areas if he buys the roaster.

Question Two.) If Forster’s does not invest in the roaster, does Robbie need to worry about the
difference in demand scenarios? Why or why not? Robbie does not have to worry about the difference
in demand if he does not buy the coffee roaster. If he doesn’t buy the roaster then the expected profit
wont make a difference with demand because the scenarios will be over the 14,400 max.

Low demand: 18,000 Probability 33% profit: $47,440 EV: $56,540

Medium Demand: 25,000 Prob: 33% Profit: $47,440 EV:$57,840

High Demand: 35,000 Prob: 33% Profit: $69,540 EV:$57,840

Question Three.) Calculate the expected value for the two capacity options. Keep in mind that, for the
roaster option, any demand above 14,400 pounds will generate revenue of only $2.90a pound. Update
the decision tree to show tour results. The expected value for each of the capacity options are
represented.

Question Four.) What Is the worst possible financial outcome for Forster’s? The worst outcome would
be that Robbie decides to invest in the coffee roaster and then the demand for roasted coffee is low,
meaning it would be more difficult for Robbie to make his investment back and ties up $35,000 of
Robbie’s money. The best financial outcome? The best outcome would be that Robbie buys the coffee
roaster and then the demand for roasted coffee is high.

Reference

Bozarth, C. C., & Handfield, R. B. (2005). Introduction to operations and supply chain management.
Upper Saddle River, NJ: Pearson Prentice Hall.