Case Study

RED BRAND CANNERS

On Monday, September 13,1995, Mr. Mitchell Gordon, President of Red Brand Canners, asked
the Controller, the Sales Manager,and the Production Manager 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, and packing operations would have to be started
by the following Monday. Red Brand Canners was a medium-size company which canned and
distributed a variety of fruit and vegetable products under private brands in the western states.
Mr. William Cooper, the Controller, and Mr. Charles Myers, the Sales Manager, were the first to
arrive in Mr. Gordon's office. Dan Tucker, the 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 their report, about 20% of the crop was Grade "A" quality and the
remaining portion of the 3,000,000-pound crop was Grade "B".
Gordon asked Myers about the demand for tomato products for the coming year. Myers replied
that they could sell all of the whole canned tomatoes they could produce. The expected demand
for tomato juice and tomato paste, on the other hand, was limited. The Sales Manager then
passed around the latest demand forecast, which is shown in Exhibit 1. He reminded the group
that the selling prices had been set in light of the long-term marketing strategy of the Company,
and potential sales had been forecasted at these prices.
Exhibit 1 Demand Forecasts

PRODUCT
24-2 whole tomatoes
24-2 Choice peach halves
24-2 Peach nectar
24-2 Tomato juice
24-2 Cooking apples
24-2 Tomato paste

Selling
Price
Per Case
$1A.00
$1B.20
$13.B0
$13.50
$14.D0
$11.40

Demand
Forecast
(Cases)
8A0,000
10,000
5,000
5C,000
15,000
8D,000

Bill Cooper, after looking at Myers' estimates of demand, said that it looked like 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 the 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 Cooper had computed the tomato
products contributions (see Exhibit 2).
Dan Tucker brought to Cooper's attention that, although there was ample production capacity, it
was impossible to produce all whole tomatoes as too small a portion of the tomato 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.
Rating tomatoes according to this scale, "A" tomatoes averaged nine points per pound and "B"
tomatoes averaged five points per pound. Tucker noted that the minimum average input quality
for canned whole tomatoes was eight and for juice it was six points per pound. Paste could be
made entirely from "B" grade tomatoes. This meant that whole tomato production was limited to
8A0,000 pounds.
Exhibit 2 Product Item Profitability (PS. You have to change the selling prices with the prices
above which were given according to your ID)
24-2
Canned
Whole
Tomatoes
$12.00

24-2
Peach
Halves
$16.20

24-2
Peach
Nectar
$13.80

$3.54
$0.72
$1.20
$2.10
$3.24
$10.80

$4.20
$0.96
$0.90
$1.68
$5.40
$13.14

$3.81
$0.69
$1.20
$1.80
$5.10
$12.60

$3.96
$1.08
$2.55
$1.95
$3.60
$13.14

$2.10
$0.66
$0.84
$2.10
$2.70
$8.40

$1.62
$0.78
$1.14
$2.31
$4.50
$10.35

$1.20
$0.84

$3.06
$2.10

$1.20
$1.56

$0.36
$0.63

$6.30
$2.25

$1.05
$0.69

Net Profit
$0.36
1
Product usage is as given below:

$0.96

-$0.36

-$0.27

$4.05

$0.36

PRODUCT
Selling Price
Variable Costs:
Direct Labor
Variable OHD.
Variable Selling
Packaging Mat'l
Fruit1
Total Var. Costs
Contrib.to profit
Less Allocated OHD

PRODUCT
Whole Tomatoes
Peach Halves
Peach Nectar
Tomato Juice
Cooking Apples
Tomato Paste

24-2
24-2
TomatoJuic Cooking
e
Apples
$13.50
$14.70

24-2
Tomato
Paste
$11.40

POUNDS PER CASE

18,A0
18,B0
17,C0
20,D0
27,A0
25,B0

Gordon stated that this was not a real limitation. He had been recently solicited to purchase
80,000 pounds of Grade "A" tomatoes at 25 1/2 cents per pound and at that time had turned
down the offer. He felt, however, that the tomatoes were still available.
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 the tomato cost should be allocated on the basis of quality and quantity rather than by
2

quantity only as Cooper had done. Therefore, he had recomputed the marginal profit on this
basis (see Exhibit 3), and from his results, Red Brand should use 2,0B0,000 pounds of the "B"
tomatoes for paste, and the remaining 40C,000 pounds of "B" tomatoes and all of the "A"
tomatoes for juice. If the demand expectations were realized, a contribution of $144,000 would
be made on this year's tomato crop.
Exhibit 3

Marginal Analysis of Tomato Products

Z = Cost per pound of A tomatoes in cents

Y = Cost per pound of B tomatoes in cents
(1) (600,000 lbs. x Z) + (2,400,000 lbs. x Y) = (3,000,000 lbs. x $0.18)
(2) Z/9 = Y/5
Z = 27.96 cents per pound
Y = 15.54 cents per pound

PRODUCT
Selling Price
Variable Cost
(Excl. tomato cost)
Subtotal
Tomato Cost
Marginal Profit

CANNED
WHOLE
TOMATOES
$12.00
$7.56

TOMATO
JUICE
$13.50
$9.54

TOMATO
PASTE
$11.40
$5.85

$4.44
$4.47
-$0.03

$3.96
$3.72
$0.24

$5.55
$3.90
$1.65

Questions
1. Why does Tucker state that the whole tomato production is limited to 800,000 pounds (i.e.,
where does the number 800,000 come from)?
2. What is wrong with Cooper's suggestion to use the entire crop for whole tomatoes?
3. How
does
Myers
compute
his
tomato
costs
in
Exhibit
3?
How does he reach his conclusion that the company should use 2,0B0,000 pounds of "B"

tomatoes for paste, the remaining 40C,000 pounds of "B" tomatoes, and all of the "A" in
juice? What is wrong with Myers's reasoning?
4. Without including the possibility of the additional purchases suggested by Gordon, formulate
as an LP the problem of determining the optimal canning policy for this season's crop. Define
your decision variables in terms of pounds of tomatoes. Express the objective function
coefficients in cents per pound.
5. How should your model be modified to include the possibility of the additional purchases
suggested by Gordon?
Suppose Produce Inspection could use three grades to estimate the quality of the tomato crop.
"A" tomatoes average nine points per pound, "B" tomatoes average six points per pound, and
"C" tomatoes average three points per pound. Using this system their report would indicate that
600,000 pounds are grade "A" quality, 1,600,000 pounds are grade "B," and the remaining
800,000 pounds are grade "C." Paste has no minimum average quality requirement.
6. What is the maximum production in pounds of canned whole tomatoes? Can Cooper's
suggestion be implemented?
Myers extends his analysis to three grades in Exhibit 4. On the basis of Exhibit 4, Myers
recommends using all grade "C" tomatoes and 1,200,000 pounds of grade "B" tomatoes for
paste, and all grade "A" tomatoes and all remaining grade "B" tomatoes for juice.
7. How
does
Myers
compute
his
tomato
costs
in
Exhibit
4?
How does he reach his conclusion to use 800,000 pounds of grade "C" and 1,200,000 pounds
of grade "B" for paste, and the rest of the tomatoes for juice? What is wrong with Myers's
reasoning?
8. Without including the possibility of the additional purchases suggested by Gordon, formulate
as an LP the problem of determining the optimal canning policy for this season's crop. Define
your decision variables in terms of pounds of tomatoes. Express the objective
function in cents.
9. How should your model be modified to include the possibility of the additional purchases
suggested by Gordon?
10. Obtain sensitivity report and interpret all the cost coefficients and RHS by means of
reduced cost and shadow prices.
EXHIBIT 4 MYERS'S MARGINAL ANALYSIS OF TOMATO PRODUCTS
Z = Cost per pound of A tomatoes in cents
Y= Cost per pound of B tomatoes in cents
X = Cost per pound of C tomatoes in cents
(1)
(2)
(3)

(800,000 lbs. x Z) + (1,600,000 lbs. x Y) + (800,000 lbs. x X) = (3,000,000 lbs. x 18<f)

Z/9 = 7/6
Y/6 = X/3
Z=27.93 cents per pound
Y=18.61 cents per pound
X= 9.30 cents per pound

PRODUCT

CANNED
WHOLE
TOMATOES

TOMATO
JUICE

TOMATO
PASTE

Selling Price

$12.00

$13.50

$11.40

Variable Cost

$7.56

$9.54

$5.85

$4.44

$3.96

$5.55

$4.47
($.03)

$3.72
$0.24

$2.33
$3.22

(Excl. Tomato Costs)

Tomato Cost
Marginal Profit