red brand canners summary
TRANSCRIPT
Red Brand Canners Case Summary
Sylwia BohaczykMalgorzata Pankowska
Ben McCombsOctober 4, 2011
Sylwia BohaczykMalgorzata Pankowska
Ben McCombsOctober 4, 2011
Red Brand Canners is a producer of canned and dried fruit and vegetable products
made for private brands in the Western United States. They don't grow their own crops,
but purchase them from various growers. Mitchell Gordon, VP of Operations for the
company, assembled a group of department leaders to discuss the current situation and
operations strategy. Crops were starting to arrive at the cannery and packing operations
were to start the following day.
Of the three million pounds of crops lined up for use, 20 percent were considered
grade A and the rest were grade B. According to Charles Myers, the sales manager, the
demand is such that they can sell as many whole canned tomatoes as they are able to
produce, but demand is limited for tomato juice and tomato paste. Per Bill Cooper,
corporate controller, the company is set to do well on its tomato products. Cooper
reported that incremental profit on whole tomatoes is higher than any other tomato
product. The average wholesale price for tomatoes, he notes, is six cents per pound.
Dan Tucker, the production manager, noted that while they have ample
production capacity, it would be impossible to produce only whole canned tomatoes. The
reason for this is that whole canned tomatoes require grade A quality produce, but only
20 percent of the crop meets that standard.
The company used a rating scale for tomatoes that ran from zero to ten, with ten
being the highest rating. Grade A tomatoes had an average grade of nine points per
pound, while grade B tomatoes averaged five points per pound. Whole canned tomatoes
require a minimum of an eight rating, while juice requires just six points. Paste can be
made without any grade A tomatoes at all. The upshot of all this was that whole tomato
production was limited to 800 thousand pounds, based on currant crop purchases. Gordon
mentioned that it would be possible to purchase another 80 thousand pounds of grade A
tomatoes at 8.5 cents per pound.
Myers took a different view on how to calculate product contribution. He felt that
the calculation should be based on both quality and quantity rather than only quantity. He
said that the company should use two million pounds of grade B tomatoes for paste, and
400 thousand pounds of grade B tomatoes plus the entire grade A crop of tomatoes for
juice. This, he said, should yield a total contribution of $48,000 on the tomato crop.
PROBLEM STATEMENT:
To choose the product mix that (the variation of the weights of A and B grade
tomatoes) would maximize the profit.
ANALYSIS:
Option 1
As suggested by Cooper, the Brand Canners may chose to produce all whole tomatoes,
with no production of other tomatoes products. Based on his calculations (exhibit 2 in a
source documents) the incremental profit on the whole tomatoes is greater than on any
other tomatoes product. Still, this approach has some significant weaknesses. First of all,
there is restriction about the whole tomatoes quality – they need to maintain the average
level of 8. Knowing that the company has limited resources of grade“A” tomatoes -
600,000 lb (see exhibit A) - only 200,000 lb of grade B tomatoes may be mixed together
with the premier quality fruits in order to keep the required quality. Therefore in this
situation the maximum production could reach 800,000 lbs of whole tomatoes cans. As a
result the firm would have to dispose 2,200,000 lbs of the grade B fruits, which would
become useless due to the lack of other production than the whole tomatoes. Such a waste
of resources has its cost of $132,000 that will have to be “sunk” by the production
process.
Thus, in order to utilize the entire crop of 3,000,000 lbs of tomatoes and keep grade 8 of
the product, another 7,200,000 lbs of quality A fruits (see exhibit B for calculations).
Obviously the company would have to significantly increase its manufacturing process
capacity. Since it is quite difficult, the easiest may be to purchase additional grade “A”
tomatoes for ₵8.5 per pound. Assuming that there are 80,000 lbs available for buying, the
company could increase its whole tomatoes production by 106,667 lbs at a minimal
additional cost increase of ₵6.29 per pound (see exhibit B for detailed calculations).
Also, the increased production will relatively lower fixed cost (economies of scale), thus
it is reasonable to expect that the cost of acquiring additional fruits can be “washed”.
Option 2
The alternative option suggested is to use 2,000,000 lbs of the “B” tomatoes for paste,
and the remaining 400,000 lbs of the “B” tomatoes and all of the “A” tomatoes for juice.
The solution is based on the demand for paste (made entirely from the quality B fruits),
which is exactly 2,000,000 lbs (see exhibit C). The remaining 400,000 of grade B crop is
supposed to be utilized in a juice production. Yet, to satisfy a juice demand 1,000,000 lbs
of the product must be manufactured. Since there is enough input (600,000 lbs of “A”
tomatoes and 400,000 lbs of the “B” tomatoes) it is possible to produce such an amount
of the juice; though the quality level of this mixture will reach 7.4 (exhibit C), which is
much higher than the requested minimum of 6.0. It means the proportion of the premier
fruits to the 2nd grade fruits is higher than necessary, and the valuable resources of high
quality ingredients are wasted by not utilizing them in any other product.
SOLUTION:
Sylwia, figure something out. I am going to sleep.
EXHIBIT A:
Grade A & B tomatoes breakdown (in lbs):
3,000,000 x 20% = 600,000 ----------- Grade A tomatoes
(600,000 x 9) + (X x 5) = (600,000 + X) x 85,400,000 +5X = 4,800,000 + 8X600,000 = 3X
X = 200,000 ----------- Grade B tomatoes used to produce whole tomatoes cans
3,000,000 – 600,000 = 2,400,000 ----------- Grade B tomatoes
2,400,000 – 200,000 = 2,200,000 ----------- Grade B useless tomatoes
EXHIBIT B:
(Y x 9) + (2,400,000 x 5) = (Y + 2,400,000) x 89Y + 12,000,000 = 8Y + 19,200,000
Y = 7,200,000 ----------- Grade A tomatoes to be purchased in order to utilize all the 2nd quality fruits and to keep grade 8
(80,000 x 9) + (X x 5) = (80,000 + X) x 8720,000 + 5X = 640,000 + 8X80,000 = 3XX = 26,667 lbs /desired amount of “B” tomatoes to receive quality 8 whole tomatoes cans/ 80,000 /”A” tomatoes additionally purchased/+26,667 /”B” tomatoes additionally used/ 106,667 lbs / the amount of additionally produced whole tomatoes cans/
106,667 + 800,000 = 906,667
₵6 x 800,000lbs + ₵8.5x 106,667 lbs = ₵4,800,000 + ₵906,669.50 = ₵5,706,669.50 = ₵6.29 906,667 906,667 906,667
EXHIBIT C:
Mayer’s approach calculations:
80,000 cases x 25 lbs = 2,000,000 lbs ---------- Demand for the paste
50,000 cases x 20 lbs = 1,00,000 lbs ---------- Demand for the juice
(600,000 x 9) + (X x 5) = (600,000 + X) x 65,400,000 + 5X = 3,600,000 + 6X
1,800,000 lbs = X ---------- The desired amount of “B” fruits to produce quality 6 juice by mixing with 600,000 lbs of “A” tomatoes
5,400,000 + 2,000,000 = 1,000,000 x αα = 7,400,000 / 1,000,000
α = 7.4 ---------- The quality level of juice containing 600,000 lbs of “A” tomatoes and 400,000 “B” tomatoes