Red Brand Canners Case Study

Red Brand Canners Red Brand Canners is a medium-size company specialising in canning and distributing a variety of fruit and vegetable products under private brand names in the western states of the US. On Monday, September 13th, Mitchell Gordon, Vice-President of Operations, asked the Controller, the Sales Manager, and the Production Manager of Red Brand Canners to meet with him to discuss the amount of tomato products to pack that season. The tomato crop, which had been purchased at planting, was beginning to arrive at the cannery. Packing operations would have to start by the following Monday because, after this time, the fruit would begin to deteriorate. In effect this ruled out the possibility of reselling any part of the crop which, if it remained unpacked, would be worthless.

The Meeting

William Cooper, Controller, and Charles Myers, Sales Manager, were the first to arrive in Mr. Gordon's office. Dan Tucker, Production Manager, came in a few minutes later and said that he had picked up Produce Inspection's latest estimate of the quality of the incoming tomatoes. According to the report, about 20% of the 3,000,000 pound crop was Grade “A” and the remaining portion Grade “B”. Mr. Gordon asked Mr. Myers about the demand for tomato products for the coming year. Mr. Myers replied that they could sell all of the whole canned tomatoes they could produce. The expected demand for tomato juice and tomato paste, however, was limited. The Sales Manager then passed around the latest demand forecast (Exhibit 1) reminding the group that selling prices had been set in light of long-term marketing strategy of the company, and that potential sales had been forecast at these prices. After looking at Mr. Myers’ estimates of demand, Mr. Cooper said that it looked as though the company, "should do quite well on the tomato crop this year". With the new accounting system that had been set up, he had been able to compute the contribution for each product, and according to his analysis the incremental profit on whole tomatoes was greater than for any other tomato product. In May, after Red Brand had signed contracts agreeing to purchase the grower's production at an average delivered price of 18 cents per pound, Mr. Cooper had computed the tomato products' contributions (Exhibit 2).

Red Brand Canners

2

Exhibit 1. Demand Forecasts

Product Selling Price

(per case)

Demand Forecast

(cases)

Pounds

(per case)

24-2½ whole tomatoes $ 12.00 800,000 18

24-2½ choice peach halves $ 16.20 10,000 18

24-2½ peach nectar $ 13.80 5,000 17

24-2½ tomato juice $ 13.50 50,000 20

24-2¼ cooking apples $ 14.70 15,000 27

24-2½ tomato paste $ 11.40 80,000 25

Exhibit 2. Product Item Profitability (per case)

Product 24-2½

Whole

Tomatoes

($)

24-2½

Peach

Halves

($)

24-2½

Peach

Nectar

($)

24-2½

Tomato

Juice

($)

24-2½

Cooking

Apples

($)

24-2½

Tomato

Paste

($)

Selling Price 12.00 16.20 13.80 13.50 14.70 11.40

Direct labour 3.54 4.20 3.81 3.96 2.10 1.62

Variable overhead 0.72 0.96 0.69 1.08 0.66 0.78

Variable selling 1.20 0.90 1.20 2.55 0.84 1.14

Packaging material 2.10 1.68 1.80 1.95 2.10 2.31

Fruit 3.24 5.40 5.10 3.60 2.70 4.50

Total Variable Costs 10.80 13.14 12.60 13.14 8.40 10.35

Contribution 1.20 3.06 1.20 0.36 6.30 1.05

Allocated Overhead 0.84 2.10 1.56 0.63 2.25 0.69

Net Profit 0.36 0.96 (0.36) (0.27) 4.05 0.36

Mr. Tucker called Mr. Cooper's attention to the fact that, although production capacity was ample, it

was impossible to produce all whole tomatoes because too small a portion of the crop was “A” quality.

Red Brand used a numerical scale to record the quality of both raw produce and prepared products.

This scale ran from zero to ten, the higher number representing better quality. “A” tomatoes averaged

nine points per pound and “B” tomatoes five points per pound. Mr. Tucker noted that the minimum

average input quality for canned whole tomatoes was eight and for juice six points per pound. Paste

could be made entirely from “B” grade tomatoes. This meant that whole tomato production was limited

to 800,000 pounds.

Mr. Gordon stated that this was not a real limitation. Recently solicited to purchase 80,000 pounds of

Grade “A” tomatoes at 25½ cents per pound, he had turned down the offer. He thought, however, that

the tomatoes were still available.

Mr. Myers, who had been doing some calculations, said that although he agreed that the Company

"should do quite well this year", it would not be by canning whole tomatoes. It seemed to him that

tomato costs