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  • Case 6 (Forster's Market) - Marketing Homework Help

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    Ahmed Khubaib
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    Robbie is considering whether to buy a coffee roaster for his market, Forster's Market. There are two capacity options - buying a roaster for $35,000 with variable costs of $1.60 per unit or not buying and having variable costs of $3 per unit. The indifference point where the options have equal expected profit is 25,000 pounds. This suggests that a roaster would require selling externally. There are three demand scenarios - low, medium, high - each with a 33% probability. Buying a roaster has a slightly higher expected profit of $57,840 compared to $57,600 without. However, the $35,000 upfront cost and low difference in profit means Robbie

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    Robbie is considering whether to buy a coffee roaster for his market, Forster's Market. There are two capacity options - buying a roaster for $35,000 with variable costs of $1.60 per unit or not buying and having variable costs of $3 per unit. The indifference point where the options have equal expected profit is 25,000 pounds. This suggests that a roaster would require selling externally. There are three demand scenarios - low, medium, high - each with a 33% probability. Buying a roaster has a slightly higher expected profit of $57,840 compared to $57,600 without. However, the $35,000 upfront cost and low difference in profit means Robbie

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    3 views2 pages

    Case 6 (Forster's Market) - Marketing Homework Help

    Uploaded by

    Ahmed Khubaib
    Robbie is considering whether to buy a coffee roaster for his market, Forster's Market. There are two capacity options - buying a roaster for $35,000 with variable costs of $1.60 per unit or not buying and having variable costs of $3 per unit. The indifference point where the options have equal expected profit is 25,000 pounds. This suggests that a roaster would require selling externally. There are three demand scenarios - low, medium, high - each with a 33% probability. Buying a roaster has a slightly higher expected profit of $57,840 compared to $57,600 without. However, the $35,000 upfront cost and low difference in profit means Robbie

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 2

    2/9/23, 6:14 PM Case 6 (forster's market).

    | Marketing homework help

    26642235_case_6_sulotions__2.xlsx

    case 6 (forster's market).

    CaseStudy
    NOTE: Enter Inputs in Yellow-Shaded Cells.
    Revenue per unit of output (first 14,400 lbs): $7.00
    Revenue per unit of output (after 14,400 lbs): $2.90
    Variable Cost
    Max.
    Capacity Option Fixed Cost Per Unit of
    Output
    Output
    No Roaster $0.00 $3.00 14,400
    Buy Roaster $35,000.00 $1.60 40,000
    Demand
    Demand Scenario Level Probability
    (pounds)
    Low 18,000 33%
    Medium 25,000 33%
    High 35,000 33%
    Total: 100%
    *** Break-Even and Indifference Points ***
    Indifference
    Break-Even Point
    Point
    No Roaster 0 ---
    Buy Roaster 6,482 25,000
    *** Results for Different Capacity/Demand Combinations ***
    Expected
    Low Medium High
    Value
    No Roaster $57,600.00 $57,600.00 $57,600.00 $57,600.00
    Buy Roaster $47,440.00 $56,540.00 $69,540.00 $57,840.00
    Question 1.)
    The two capacity options that Robbie needs to consider are buying vs. not buying a coffee roaster. The
    costs of not buying a roaster are $0.00 (Fixed) and $3.00 (Variable) while the costs of buying a roaster are
    $35,000 (Fixed) and $1.60 (Variable). The indifference point for the two options is 25,000 pounds of coffee.
    Since the indifference point is higher than the 14,400 that Robbie will use internally, the implication is that
    he will need to sell coffee externally if he buys the roaster.

    Demand Level Probability Profit


    18,000 33% $47,440
    Expected
    Demand Level Probability
    Value
    25,000 33% $56,540
    Yes
    Demand Level Probability Profit
    EV = 35,000 33% $69,540
    $57,840
    Demand
    No Probability Profit
    Level
    25,000 100% $57,600
    EV =
    $57,600
    Question 2.)
    The demand scenarios do not make a difference in the expected profit if Forster's does not invest in the
    roaster since all of the demand scenarios are greater than the 14,400 maximum that Forster's will sell in-
    house.
    Question 3.)
    The decision tree reflects the total expected values for each of the two capacity options.
    Question 4.)

    https://www.sweetstudy.com/sites/default/files/q5/13/11/26642235_case_6_sulotions__2.xlsx 1/2
    2/9/23, 6:14 PM Case 6 (forster's market). | Marketing homework help
    The worst possible financial outcome for Forster's is that they decide to invest in the roaster and the
    demand is low. The best possible financial outcome is if they invest in the roaster and the demand is high.
    Other factors that Robbie should consider are that the difference between the expected value of buying vs.
    not buying the roaster are only $240 for the year and buying a roaster ties up $35,000 of capital. Also, if
    selling coffee is the core competency of the company, then roasting coffee would be a significant strategic
    realignment.

    Buy Roaster?

    Demand Outcome

    Demand Outcome

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