Ideally, the production of fruits and vegetables is usually done seasonally, yet the marketing as well as the distribution of fruits and vegetables requires the availability of farm products throughout the year. As distribution companies of fresh farm produce embark on a lasting solution to the issue of matching availability of fruit and vegetable products with consumer demand, most of them are battling with the problems of either insufficient stocks of the farm products or issues of crop packaging. For instance, Red Brand Canners is no exceptional with the problem of tomato crop packaging which the company is devising ways of whether to resell the unpacked crop products or come up with a concrete measure of determining the amount of tomato products to pack during the season.
This report attempts to analyze the production and distribution dynamics being discussed in the meeting between the management and staff of Red Brand Canners while giving the summary of the results thereof, the interpretation of the results as well as drawing conclusions and recommendations for the benefit of the companys management.
The Model without the Option of Additional A Tomatoes
The main problem that Red Brand Canners is currently facing in absence of availability of the additional A tomatoes is that of appropriate packaging of the amount of tomato crop products which had been purchased at planting. Given the perishability of the fruit and tomato products as well as the short time before they deteriorate, there was need for a quicker solution to the problem at hand. According to the report prepared by Dan Tucker, the production manager, approximately 20% of the 3,000,000 pound crop yields received at the cannery was Grade A while the rest of the portion was Grade B.
In regard to the problem being faced by Red Brand Canners, the following model shows the product mix decisions quality, quantities and profits in which the company should produce before commencing its distribution phase.
MIX DECISION Whole Juice Paste Total Required Available
Grade A+ 80 0 0 80 80
Grade B 205 195 2,000 2,400 2,400
Total Production 285 195 2,000 Demand 14,400 1,000 2,000 QUALITY Whole Juice Paste Quality Grade A+ 720 0 0 9 Grade B 1,025 975 10,000 5 Total Quality 1,745 975 10,000 Required Total Quality 6,560 1,560 10,000 Average Quality 8.0 6.0 5.0 Required Average Quality 8.0 6.0 5.0 PROFIT Whole Juice Paste Total Contribution Contribution Margin $247 $198 $222 $677,620 Model RBC 2
From the above model on product mix, quality and quantity, it can be deduced that;
The company can decide to produce more of Grade B products since the expected demand for both tomato Juice and Paste is limited. Additionally, the increase in the production of Grade B of the product estimated to be 300 for Whole, 250 for Juice and maintain the Paste product at 2,000 would be an ideal option for the company in order to increase product yield. Based on the requirements of increasing the profit margin without initiating an additional product line, improving the production of the Whole and Juice would be the best way for the company.
Additional supply of B tomatoes
Mitchell Gordon is absolutely right refuse purchasing the tomatoes brought to him by Dawkins with the claim that the 18 percent that is offered per pound is based on the information that the incoming crop usually comprises a mix of Grade A and Grade B. this is because the report prepared by Dan Tucker, the production manager, which stated that approximately 20% of the 3,000,000 pound crop yields received at the cannery was Grade A while the rest of the portion was Grade B. Furthermore, putting the selling price of B tomatoes at a flat rate of 18 cents per pound would imply that the company is poised to making loses of up to 80% of the total B tomatoes yield to be produced in the cannery.
However, the contribution of the additional B Tomatoes is to help increase the sales volume that will later increase the profit margin. Consequently, the additional B tomatoes will act as an improvement in the production sector where much resource will be required to produce the additional products hence increasing the production costs as well. According to me, I would not attempt to purchase the extra b tomatoes at 18 cents per pound because that would imply an impending loss to be incurred in case the products are not packaged in the right manner.
However, if one million pounds is offered for the B tomatoes at a price of 15 cents per pound then I would gladly purchase them. Now, when it comes to allocating the newly-purchased B tomatoes to the different products, I would employ the use of cost pools which takes into consideration the Activity Based Costing method that allocates the products according to their quantity base.
Closing down Production Lines?
RED BRAND CANNERS MIX DECISION Whole Juice Paste Total Required Available
Grade A 525 75 0 600 600
Total Production 525 75 0 Demand 14,400 1,000 2,000 QUALITY Whole Juice Paste Quality Grade A 39,375 5,625 0 9 Total Quality 39,375 5,625 0 Required Total Quality 4,200 450 0 Average Quality 75.0 75.0 0,0 Required Average Quality 8.0 6.0 5.0 PROFIT Whole Juice Paste Total Contribution Contribution Margin $247 $198 $222 $144,525 Starting up the production line will not only entail a substantial cost of setting up the new phase of production but will also mean additional workload for the company. Basically, when there is an increased demand of a given product on the market all year-round will lead to a high demand for fresh produce which in turn forces companies or their affiliates to create selling points for their products.
Going by Tuckers estimates which tends to set the production cost at $50,000 per line, it would imply that the company will save the said $50,000 it if chooses not to start up a particular line of product. Using the Paste product line, any decision not to start the Paste product line would necessitate low profits for the company due to the reduced sales volume of the products.
On the other hand, if the firm chooses not to start up the Paste line, the companies will likely experience losses particularly if the customer demand is not retained by increasing another product line, say the Whole product. Furthermore, the computations made on the contribution made for each product line shows an incremental in profit on Whole product line thus implying that the best production line for Red Brand Canner to start up is the Whole Tomatoes.
One year later
When determining the quantity of products to be purchased, it is imperative that you examine the historical costs of the said product. This implies that the futuristic opportunity of a product is entirely based on its current pricing models in place. For the case of Red Brand Canner Company that is seeking to prepare for the annual negotiations of prices and quantity with the tomato farmers for their yearly produce, the company settles on an agreeable price of 20 cents per pound for each unit product.
Based on the 20 cents price of tomatoes per pound, I would recommend for the Red Brand Canner Company to purchase 10 million pounds of tomatoes. However, during a normal (N), year, I would recommend that the company maintains the quantity of 10 million pounds of tomatoes to be purchased due to the cost effectiveness of the scheme. Consequently, Red Brand Canner will have to reduce the purchase of the tomatoes to at least 8 million pounds per year during a Poor (P) year.
In the event that the company orders the S (10 million) pounds of tomatoes for the upcoming year, the likely outcome to be experienced is the increased sales in the preceding year thereby creating many profits. On the other hand, if the company chose to order for the N and P products during the normal year, the likelihood of having reduced sales during the year is highly to be experienced.
Even though Tucker maintains that the company has the potential to buy up to 13 million pounds of tomatoes annually, I would still recommend that the Red Brand Canner should not exceed the projected amount of pounds but instead order at most 10 million pounds of tomatoes during the new year to ensure stability in prices and costs of the products being purchased.
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