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Forster's Market

Robbie at Forster's Market needs to decide whether to invest $35,000 to buy a coffee roaster to make their own coffee, or continue buying coffee at $3/lb. The indifference point is 25,000 lbs, where costs are equal. Above this amount, making coffee is cheaper. However, demand would need to stay high continuously to justify the investment. Drawing a decision tree shows the expected values for each option under different demand scenarios. The worst outcome is choosing to invest and have medium demand, losing $25,000. The best is staying as-is with low demand and making $9,800 profit. Other strategic factors to consider include potential growth, infrastructure, competition and supply/demand trends.

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Brad Hollenbeck
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1K views1 page

Forster's Market

Robbie at Forster's Market needs to decide whether to invest $35,000 to buy a coffee roaster to make their own coffee, or continue buying coffee at $3/lb. The indifference point is 25,000 lbs, where costs are equal. Above this amount, making coffee is cheaper. However, demand would need to stay high continuously to justify the investment. Drawing a decision tree shows the expected values for each option under different demand scenarios. The worst outcome is choosing to invest and have medium demand, losing $25,000. The best is staying as-is with low demand and making $9,800 profit. Other strategic factors to consider include potential growth, infrastructure, competition and supply/demand trends.

Uploaded by

Brad Hollenbeck
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Case Study Forsters Market

Questions:
1.

What are the two capacity options that Robbie needs to consider?
What are their fixed and variable costs?
What is the indifference point for the two options?
What are the implications of the indifference point?
Answers:
Make coffee vs Buy Coffee
Make: Fixed Cost = $35,000 Variable Cost = $1.60/lbs.
Buy: Fixed Cost = $0
Variable Cost = $3.00/lbs.
Indifference point: $35,000 + $1.6 x (lbs. Coffee) = $0 + $3.0 x (lbs. Coffee)
25,000 lbs. of coffee is indifference point
Demand would have to be at the high level (greater than 25,000 lbs.) continually in order to reap the value of investing in a
roaster.

2.

Draw the decision tree for the roaster decision.


If Foresters does not invest in the roaster, does Robbie need to worry about the different demand scenarios outlined
above?
Why or why not?

No. Forsters will continue to make a profit at any demand level by not investing in a roaster. They could possibly reduce the
$3 cost by buying in bulk during high demand.
3.

Calculate the expected value for the two capacity options. Keep in mind that, for the roster option, any demand above
14,400 pounds will generate revenue of only $2.90 a pound.
Update the decision tree to show your results.

4.

What is the worst possible financial outcome for Forsters?


The best possible financial outcome?
What other factors, core competency, strategic flexibility, etc, should Robbie consider when making this decision?
Answers:
The worst possible outcome for Robbie is choosing high demand because he will lose profit but if he picks medium demand
it balances out by 75000 which makes it an equal outcome. The best outcome would be low demand because he would
make $9800 profit but it would be for the best if he keeps on buying from the local supplier instead of buying an industrial
size coffee roaster.
Other factors that should be considered:
Potential growth rate, infrastructure, competition and supply & demand

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