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 $3 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 $35,000 every 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.
Please complete questions 1-4. Please upload your answers either in excel or word format. Please include 2 peer reviewed journal articles in APA format with your response.
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