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RED BRAND CANNERS
On Monday, November 15th, 2004, 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. Red Brand was a medium-size company which canned and distributed a
variety of fruit and vegetable products under private brand names in the western states.
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 ha
d picked up Produce Inspection’s latest estimate of the quality of the incoming tomatoes.
According to the report, about 25 per cent of the 7,000,000 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 Type A and Type B 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. Myer’s 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 signed contracts agreeing to purchase the grower’s production at
an average delivered price of 9 cents per pound, Mr. Cooper had computed the tomato products’
contributions (Exhibit 2).
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Exhibit 1 Red Brand Canners
Demand Forecasts
Product
24-2.5 whole tomatoes A
24-2.5 whole tomatoes B
24-2.5 choice peach halves
24-2.5 peach nectar
24-2.5 tomato juice
24-2.5 cooking apples
24-2.5 tomato paste
Selling Price per Case
€6.00
€4.50
€5.50
€4.60
€5.60
€4.90
€4.70
Demand Forecast
(Cases)
200,000
600,000
10,000
50,000
100,000
150,000
100,000
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 10 points per pound and ‘B’ tomatoes five points per pound. Mr. Tucker noted
that the minimum average input quality for canned whole tomatoes Type A was ten, for juice was
seven and for paste was six points per pound1.* Whole canned tomatoes Type B could be made
entirely from ‘B’ grade tomatoes.
Mr. Gordon stated that this was not a real limitation. Recently solicited to purchase 100,000
pounds of Grade ‘A’ tomatoes at 9.50 cents per pound he had turned down the offer. He felt,
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 should be allocated on the basis of quality and quantity rather than by quantity only,
as Mr. Cooper had done. Therefore, he had recomputed the material profit on this basis (Exhibit 3)
and from his results, believed that Red Brand should focus on producing whole canned tomatoes
type B and tomato paste.
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This meant, for example, that for every pound of ‘B’ tomatoes used in a batch of tomato paste, one-fourth pound of
‘A’ tomatoes would have to be used to maintain an average quality level of six points per pound for the batch.
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Exhibit 2 Red Brand Canners
Product Item Profitability
24-2.5
Whole
Tomatoes
Type A
24-2.5
Whole
Tomatoes
Type B
24-2.5
Choice
peach
Halves
24-2.5
Peach
Nectar
24-2.5
Tomato
Juice
24-2.5
Cooking
Apples
24-2.5
Tomato
Paste
€6.00
€4.50
€5.50
€4.60
€5.60
€4.90
€4.70
Direct labour
1.9
1
1.40
1.27
1.24
0.70
0.5
Variable O.H.
0.4
0.4
0.32
0.23
0.36
0.22
0.17
Variable selling
0.7
0.7
0.30
0.40
0.85
0.28
0.3
1
0.5
0.56
0.60
0.65
0.70
0.7
1.8
1.8
1.80
1.70
2.25
0.90
2.7
Total Variable
Costs
Contribution
5.8
4.4
4.38
4.20
5.35
2.80
4.37
0.2
0.1
1.12
0.40
0.25
1.10
0.33
Less Allocated
Overhead
0.1
0.1
0.70
0.52
0.23
0.75
0.13
Net Profit
0.1
0.00
0.42
(0.12)
0.02
(0.35)
0.2
Product
Selling price per
case
Variable costs:
Packaging
material
Fruit*
*Product usage is as given below:
Product
Whole Tomatoes
Peach Halves
Peach Nectar
Tomato Juice
Cooking Apples
Tomato Paste
Pounds per Case
20
18
17
25
27
30
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Exhibit 3 Red Brand Canners
Marginal Analysis of Tomato Products
Z = Cost per pound of A tomatoes in cents
Y = Cost per pound of B tomatoes in cents
(1) (1,750,000 lbs. * Z) + (5,250,000 lbs. * Y) = (7,000,000 lbs. * 9 )
(2) Z/10 = Y/5
Z = 14.4 cents per pound
Y = 7.20 cents per pound
Product
Canned
Canned
Whole
Whole
Tomatoes ‘A’ Tomatoes ‘B’
Tomato
Juice
Tomato
Paste
Selling price
€6.00
€4.5
€5.6
€4.7
Variable cost
(excluding tomato costs)
4.00
€ 2.00
2.60
€ 1.90
3.10
€ 2.50
1.67
€ 3.03
2.88
(€ 0.88)
1.44
€ 0.46
2.52
(€ 0.02)
2.59
€ 0.44
Tomato cost
Marginal Profit
NOTES:
(1) Balances sum of costs to the total expenditure
(2) The costs are now balanced according to their points value
YOUR ASSIGNMENT ON THE CASE
1.
Both Mr. Cooper and Mr. Myers made assessments of tomato product profitability (in
Exhibits 2 & 3 respectively). Which, if either, of the analyses is correct for the
production decisions which have to be made?
2.
Formulate, as a linear programme, the problem of determining the quantities of whole
tomatoes, tomato juice and tomato paste that should be produced from the 7 million
pound crop.
3.
How should Mr. Gordon decide whether or not to buy the additional 80,000 pounds
of grade A tomatoes at 9.5 cents/pound? (Note: there are several possibilities.)
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