CASE

RED BRAND CANNERS

On Monday, September 13,1965, Mr. Mitchell Gordon, President of Red rand !anners, as"ed the !ontroller, the Sales Mana#er, and the Prod$ction Mana#er to meet %ith him to disc$ss the amo$nt of tomato prod$cts to pac" that season. &he tomato crop, %hich had been p$rchased at plantin#, %as be#innin# to arri'e at the cannery, and pac"in# operations %o$ld ha'e to be started by the follo%in# Monday. Red rand !anners %as a medi$m(si)e company %hich canned and distrib$ted a 'ariety of fr$it and 'e#etable prod$cts $nder pri'ate brands in the %estern states. Mr. *illiam !ooper, the !ontroller, and Mr. !harles Myers, the Sales Mana#er, %ere the first to arri'e in Mr. Gordon+s office. ,an &$c"er, the Prod$ction Mana#er, came in a fe% min$tes later and said that he had pic"ed $p Prod$ce -nspection+s latest estimate of the .$ality of the incomin# tomatoes. /ccordin# to their report, abo$t 012 of the crop %as Grade 3/3 .$ality and the remainin# portion of the 3,111,111(po$nd crop %as Grade . Gordon as"ed Myers abo$t the demand for tomato prod$cts for the comin# year. Myers replied that they co$ld sell all of the %hole canned tomatoes they co$ld prod$ce. &he e4pected demand for tomato 5$ice and tomato paste, on the other hand, %as limited. &he Sales Mana#er then passed aro$nd the latest demand forecast, %hich is sho%n in 64hibit 1. 7e reminded the #ro$p that the sellin# prices had been set in li#ht of the lon#(term mar"etin# strate#y of the !ompany, and potential sales had been forecasted at these prices. Exhibit 1 RED BRAND CANNERS Demand Forecasts, cases of 24-2 1/2 cans Prod$ct Sellin# Price 8 per !ase *hole &omatoes Peach 7al'es Peach >ectar &omato ?$ice !oo"in# /pples &omato Paste <.11 5.<1 <.61 <.51 <.91 3.=1

,emand 9orecast :!ases; =11,111 11,111 5111 51111 15111 =1111

ill !ooper, after loo"in# at Myers+ estimates of demand, said that it loo"ed li"e the !ompany 3sho$ld do .$ite %ell :on the tomato crop; this year.3 *ith the ne% acco$ntin# system that had been set $p, he had been able to comp$te the contrib$tion for each prod$ct, and accordin# to his analysis the incremental profit on the %hole tomatoes %as #reater than for any other tomato prod$ct. -n May, after Red rand had si#ned contracts a#reein# to p$rchase the #ro%er+s prod$ction at an a'era#e deli'ered price of 6 cents per po$nd !ooper had comp$ted the tomato prod$cts contrib$tions :see 64hibit 0;.

Exhibit 2 RED BRAND CANNERS rod!ct "tem rofitabi#it$ %A## amo!nts are in do##ars &er case of 24-2 1/2 cans' rod!ct Sellin# Price @ariable !ostsA ,irect Babor @ariable O'erhead @ariable Sellin# Pac"a#in# Material &otal @ariable 9r$it !osts !ontrib$tion to profit Bess /llocated O'erheads >et Profit (ho#e )omatoes <.11 1.1= 1.0< 1.<1 1.C1 1.1= 3.61 1.<1 1.0= 1.10 each *a#+es 5.<1 1.<1 1.30 1.31 1.56 1.=1 <.3= 1.10 1.C1 1.30 each Nectar <.61 1.0C 1.03 1.<1 1.61 1.C1 <.01 1.<1 1.50 (1.10 )omato ,!ice <.51 1.30 1.36 1.=5 1.65 1.01 <.3= 1.10 1.01 (1.19 Coo-in . A&&#es <.91 1.C1 1.00 1.0= 1.C1 1.91 0.=1 0.11 0.11 1.35 )omato aste 3.=1 1.5< 1.06 1.3= 1.CC 1.51 3.<5 1.35 1.35 1.10

rod!ct !sa.e is as .i+en be#o/0 rod!ct o!nds &er Case *hole 1= &omatoes Peach 7al'es 1= Peach >ectar 1C &omato ?$ice 01 !oo"in# 0C /pples &omato Paste 05 ,an &$c"er bro$#ht to !ooper+s attention that, altho$#h there %as ample prod$ction capacity, it %as impossible to prod$ce all %hole tomatoes as too small a portion of the tomato crop %as 3/3 .$ality. Red rand $sed a n$merical scale to record the .$ality of both ra% prod$ce and prepared prod$cts. &his scale ran from )ero to ten, the hi#her n$mber representin# better .$ality. Ratin# tomatoes accordin# to this scale, 3/3 tomatoes a'era#ed nine points per po$nd and 3 3 tomatoes a'era#ed fi'e points per po$nd. &$c"er noted that the minim$m a'era#e inp$t .$ality for canned %hole tomatoes %as ei#ht and for 5$ice it %as si4 points per po$nd. Paste co$ld be made entirely from 3 3 #rade tomatoes. &his meant that %hole tomato prod$ction %as limited to =11,111 po$nds.

Gordon stated that this %as not a real limitation. 7e had been recently solicited to p$rchase =1,111 po$nds of Grade 3/3 tomatoes at = 1D0 cents per po$nd and at that time had t$rned do%n the offer. 7e felt, ho%e'er, that the tomatoes %ere still a'ailable. Myers, %ho had been doin# some calc$lations, said that altho$#h he a#reed that the !ompany 3sho$ld do .$ite %ell this year,3 it %o$ld not be by cannin# %hole tomatoes. -t seemed to him that the tomato cost sho$ld be allocated on the basis of .$ality and .$antity rather than by .$antity only as !ooper had done. &herefore, he had recomp$ted the mar#inal profit on this basis :see 64hibit 3;, and from his res$lts, Red rand sho$ld $se 0,111,111 po$nds of the 3 3 tomatoes for paste, and the remainin# <11,111 po$nds of 3 3 tomatoes and all of the 3/3 tomatoes for 5$ice. -f the demand e4pectations %ere reali)ed, a contrib$tion of 8<=,111 %o$ld be made on this year+s tomato crop. Exhibit 1 RED BRAND CANNERS 2ar.ina# Ana#$sis of )omato rod!cts E F !ost per po$nd of / tomatoes in cents G F !ost per po$nd of tomatoes in cents :611,111 lbs. 4 E; H :0,<11,111 lbs. 4 G; F :3,111,111 lbs. 4 6; E G ((( F ((( 9 5 E F 9.30 cents per po$nd G F 5.1= cents per po$nd )omato rod!cts &omato &omato ?$ice Paste <.51 3.=1 3.1= 1.95 1.30 1.0< 1.1= 1.=5 1.31 1.55

Sellin# Price @ariable !ost :e4cl. tomato cost; &omato !ost Mar#inal Profit

!anned *hole <.11 0.50 1.<= 1.<9 (1.11