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Belgrove Farms
Case
Coaching Notes
Top Ten LDC Concepts in
Case
Micro: #1: Opportunity Cost.
 Micro: #2: Comparative Advantage
 Micro: #4: How prices affect resource allocation.
 MA : #8. How to use cost data in decisionmaking. What is relevant?
 SOM : # 5. The concept of expected value and how
to calculate it
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Case Facts – Key Players
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Belgrove Farms – Client
– Belgrove -- CEO
– Kevin Thorp – Operations Manager
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Benderson Consulting
– Marna Team Leader
– You are part of Marna’s team
Case Facts – Overview
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Belgrove Farms owns 4 different fields and grows AA Corn
Thorp wants Belgrove Farms to switch to GM Corn
His is profit analysis is contained in Attachment 1
– Is based on a price of $2.20 for GM corn
– Assumes entire acreage is devoted to either AA or GM corn
– Ignores price uncertainty of GM corn
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Productivity differs across farms (See Attachment 2)
Belgrove’s Income statements are available (See Attachment 3)
Marna wants her team to analyze various issues (See Attachment 4)
Forecasted price for GM corn (See Attachment 5)
Case facts: Price Data
 AA
Corn is expected to sell for $ 2.00/bushel
 GM Corn has two possible Prices with equal
probability.
– GM Corn: $ 1.90/bushel
– GM Corn: $ 2.20/bushel
Case Facts – Key Issue
What
field?
type of corn to plant in which
– How to deal with the uncertainty around GM
corn’s prices?
– What is differential profit from the
recommended growing strategy?
When does BF know prices?
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Assumption: Prices revealed before planting decision
Today
Actual Outcome
Action Date
Analysis being done
Prices of GM corn known
Planting decision made
Belgrove Farms is a price
taker firm (most competitive
market)
Belgrove Farms is one of thousands of firms
producing the same product.
 As such, they have no market power to set price, but
take the price from the market.
 The market price is determined by the interaction of all
the buyers (Demand) and sellers (Supply) of yellow
corn.
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Economic & Accounting
Concepts of Profit
Business firms attempt to maximize economic profit. ()
  = Total Revenue – Total Economic Cost
 Total Revenue = Price x Quantity
 Total Economic Cost = the Opportunity Cost of the
resources used in production
 Accounting Profit = Total Revenue – Total Variable and
Fixed Costs
 Incurred Cost is the actual amounts paid or obligations
entered into for future payments
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Comparative Advantage
A
resource (farm) has a comparative advantage
in the production of a good, (GM corn) if it has
the lowest opportunity cost of production
 The four farms have differing relative abilities to
produce AA or GM corn
 The production decision should compare each
farms gain (Contribution Margin) with the
opportunity cost of production
Opportunity Cost of
Production
 The
opportunity cost of any output is the value
of the best alternative given up
 The economic (opportunity) cost of producing
GM corn depends on the amount of AA corn
given up and the Contribution Margin from
producing AA Corn
Cost Classifications
Variable costs -- those that change with change in activity
levels (e.g., units produced, service provided) in an
organization
 Fixed costs -- those that do not vary with the activity level
 Incremental costs - the change in costs associated with
changing the output above some base level or selecting one
course of action over another
 Relevant costs - those costs that differ across alternative
courses of action
 Opportunity costs - the benefit foregone by not using a
limited resource in its best alternative use
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