Forster’s Market is a retailer of specialty food items, including premium coffees imported crackers and cheeses, and the like. Last year, Forster’s sold 14,400 pounds of coffee. Forster’s pays a
local supplier S3 per pound and then sells the coffees for $7 a pound.
The Roaster Decision
While Forster’s makes a handsome profit on the coffee business, owner Robbie Forster thinks he can do better. Specifically, Robbie is considering investing in a large industrial-sized coffee
roaster that can roast up to 40,000 pounds per year. By roasting the coffee himself, Robbie will be able to cut his coffee costs to $1.60 a pound. The drawback is that the roaster will be quite
expensive; fixed costs (including the lease, power. training. and additional labor) will run about S35,000 a year. The roaster capacity will also be significantly more than the 14,400 pounds that
Forster’s needs. However, Robbie thinks he will be able to sell coffee to area restaurants and coffee shops for $2.90 a pound. Robbie has outlined three possible demand scenarios:
Low demand 18,000 pounds per year Medium demand 25,000 pounds per year High demand 35,000 pounds per year
These numbers include the 14,400 pounds sold at Forster’s Market. In addition, Robbie thinks all three scenarios are equally likely.
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?