Foster's Market Case Study

Brittany Gibson

Forster’s Market Case Study

1. The capacity options are 14,400 lbs. without a coffee roaster and 40,000 with a coffee roaster. The fixed cost for the 14,400 lbs. is $0.  The variable cost is $43,200.  (Fixed cost  * local supplier price or 14,400 * 3)

The fixed cost for the coffee roaster is $35,000 and the variable cost is $64,000 =40,000 *1.6.

The indifference point is determined by setting the two price options equal to each other:

3x= 35,000 + 1.6x

1.4x = 35,000

X= 35,000/1.14

X=25,000 lbs.

At 25,000 lbs. of coffee, it wouldn’t matter if he roasted his own coffee or not. Under 25,000 lbs. would cost less to purchase from local supplier but over 25,000 lbs. would cost less if he roasted the coffee himself.

1. ( See next page for illustration)

1. Profit Calculation for Buy Roasted Coffee Option:

 14,400 x ($7-3) = $57,600

Profit Calculation for Roast Coffee Himself Options:

[14,400 x ($7-1.6) + 3,600 x ($2.9-1.6)] - $35,000 =$47,440

[14,400 x ($7-1.6) + 10,600 x ($2.9-1.6)] - $35,000=$56,540

 [14,400 x ($7-1.6) + 20,600 x ($2.9-1.6)] - $35,000=$69,540

1. The worst possible financial outcome for Forster's is that they choose to invest in the roaster and the demand is low. The ideal financial outcome is to invest in the roaster while the demand is high. Other factors that Robbie must to consider are the expected value of buying versus not buying the roaster which costs $240 for the year and purchasing a roaster ties up $35,000 of capital. If roasting coffee is the focus of the company, maybe they should consider additional avenues such as brewing coffee and also focus on expanding.

1. Decision tree for roaster decision.

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