Red Brand Canners Case Summary

Sylwia Bohaczyk Malgorzata Pankowska Ben McCombs October 4, 2011

Sylwia Bohaczyk Malgorzata Pankowska Ben McCombs October 4, 2011

Red Brand Canners is a producer of canned and dried fruit and vegetable products made for private brands in the Western United States. They don't grow their own crops, but purchase them from various growers. Mitchell Gordon, VP of Operations for the company, assembled a group of department leaders to discuss the current situation and operations strategy. Crops were starting to arrive at the cannery and packing operations were to start the following day. Of the three million pounds of crops lined up for use, 20 percent were considered grade A and the rest were grade B. According to Charles Myers, the sales manager, the demand is such that they can sell as many whole canned tomatoes as they are able to produce, but demand is limited for tomato juice and tomato paste. Per Bill Cooper, corporate controller, the company is set to do well on its tomato products. Cooper reported that incremental profit on whole tomatoes is higher than any other tomato product. The average wholesale price for tomatoes, he notes, is six cents per pound. Dan Tucker, the production manager, noted that while they have ample production capacity, it would be impossible to produce only whole canned tomatoes. The reason for this is that whole canned tomatoes require grade A quality produce, but only 20 percent of the crop meets that standard. The company used a rating scale for tomatoes that ran from zero to ten, with ten being the highest rating. Grade A tomatoes had an average grade of nine points per pound, while grade B tomatoes averaged five points per pound. Whole canned tomatoes

require a minimum of an eight rating, while juice requires just six points. Paste can be made without any grade A tomatoes at all. The upshot of all this was that whole tomato production was limited to 800 thousand pounds, based on currant crop purchases. Gordon mentioned that it would be possible to purchase another 80 thousand pounds of grade A tomatoes at 8.5 cents per pound. Myers took a different view on how to calculate product contribution. He felt that the calculation should be based on both quality and quantity rather than only quantity. He said that the company should use two million pounds of grade B tomatoes for paste, and 400 thousand pounds of grade B tomatoes plus the entire grade A crop of tomatoes for juice. This, he said, should yield a total contribution of $48,000 on the tomato crop. PROBLEM STATEMENT: To choose the product mix that (the variation of the weights of A and B grade tomatoes) would maximize the profit. ANALYSIS: Option 1 As suggested by Cooper, the Brand Canners may chose to produce all whole tomatoes, with no production of other tomatoes products. Based on his calculations (exhibit 2 in a source documents) the incremental profit on the whole tomatoes is greater than on any other tomatoes product. Still, this approach has some significant weaknesses. First of all, there is restriction about the whole tomatoes quality they need to maintain the average level of 8. Knowing that the company has limited resources of gradeA tomatoes 600,000 lb (see exhibit A) - only 200,000 lb of grade B tomatoes may be mixed together with the premier quality fruits in order to keep the required quality. Therefore in this

situation the maximum production could reach 800,000 lbs of whole tomatoes cans. As a result the firm would have to dispose 2,200,000 lbs of the grade B fruits, which would become useless due to the lack of other production than the whole tomatoes. Such a waste of resources has its cost of $132,000 that will have to be sunk by the production process. Thus, in order to utilize the entire crop of 3,000,000 lbs of tomatoes and keep grade 8 of the product, another 7,200,000 lbs of quality A fruits (see exhibit B for calculations). Obviously the company would have to significantly increase its manufacturing process capacity. Since it is quite difficult, the easiest may be to purchase additional grade A tomatoes for 8.5 per pound. Assuming that there are 80,000 lbs available for buying, the company could increase its whole tomatoes production by 106,667 lbs at a minimal additional cost increase of 6.29 per pound (see exhibit B for detailed calculations). Also, the increased production will relatively lower fixed cost (economies of scale), thus it is reasonable to expect that the cost of acquiring additional fruits can be washed. Option 2 The alternative option suggested is to use 2,000,000 lbs of the B tomatoes for paste, and the remaining 400,000 lbs of the B tomatoes and all of the A tomatoes for juice. The solution is based on the demand for paste (made entirely from the quality B fruits), which is exactly 2,000,000 lbs (see exhibit C). The remaining 400,000 of grade B crop is supposed to be utilized in a juice production. Yet, to satisfy a juice demand 1,000,000 lbs of the product must be manufactured. Since there is enough input (600,000 lbs of A tomatoes and 400,000 lbs of the B tomatoes) it is possible to produce such an amount of the juice; though the quality level of this mixture will reach 7.4 (exhibit C), which is

much higher than the requested minimum of 6.0. It means the proportion of the premier fruits to the 2nd grade fruits is higher than necessary, and the valuable resources of high quality ingredients are wasted by not utilizing them in any other product. SOLUTION: Sylwia, figure something out. I am going to sleep.

EXHIBIT A: Grade A & B tomatoes breakdown (in lbs): 3,000,000 x 20% = 600,000 (600,000 x 9) + (X x 5) = (600,000 + X) x 8 5,400,000 +5X = 4,800,000 + 8X 600,000 = 3X X = 200,000 3,000,000 600,000 = 2,400,000 2,400,000 200,000 = 2,200,000 EXHIBIT B: (Y x 9) + (2,400,000 x 5) = (Y + 2,400,000) x 8 9Y + 12,000,000 = 8Y + 19,200,000 Y = 7,200,000 ----------Grade A tomatoes to be purchased in order to utilize all the 2nd quality fruits and to keep grade 8 (80,000 x 9) + (X x 5) = (80,000 + X) x 8 720,000 + 5X = 640,000 + 8X 80,000 = 3X X = 26,667 lbs /desired amount of B tomatoes to receive quality 8 whole tomatoes cans/ 80,000 +26,667 106,667 lbs /A tomatoes additionally purchased/ /B tomatoes additionally used/ / the amount of additionally produced whole tomatoes cans/ ----------Grade A tomatoes

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Grade B tomatoes used to produce whole tomatoes cans Grade B tomatoes Grade B useless tomatoes

106,667 + 800,000 = 906,667 6 x 800,000lbs + 8.5x 106,667 lbs = 4,800,000 + 906,669.50 = 5,706,669.50 = 6.29 906,667 906,667 906,667

EXHIBIT C: Mayers approach calculations: 80,000 cases x 25 lbs = 2,000,000 lbs 50,000 cases x 20 lbs = 1,00,000 lbs ------------------Demand for the paste Demand for the juice

(600,000 x 9) + (X x 5) = (600,000 + X) x 6 5,400,000 + 5X = 3,600,000 + 6X 1,800,000 lbs = X ---------The desired amount of B fruits to produce quality 6 juice by mixing with 600,000 lbs of A tomatoes 5,400,000 + 2,000,000 = 1,000,000 x = 7,400,000 / 1,000,000 = 7.4

---------The quality level of juice containing 600,000 lbs of A tomatoes and 400,000 B tomatoes