- The two capacity options that Robbie needs to consider are: Option #1 – not investing in the roaster and buy from local suppliers or Option #2 – invest in his own roaster. If he decides to go for the first option, there will be no fixed costs and a variable cost of $3 per pound of coffee. With the second option, Robbie will have $35,000 in fixed costs and a variable cost of $1.6 per pound.
About the indifference point calculation, I will have to take into consideration the total cost of buying coffee from local suppliers against the total cost of investing in a roaster: (3X = 1.6X +35,000)
X = 25,000 (pounds)
The indifference point is the coffee demand level at which both options will have the same cost. The first option of not investing in the roaster and buy from local suppliers would be significantly better in case there is a low demand to medium demand: below 25,000 per year. The second option would be significantly profitable if the demand is above 25,000 pounds.
- Low demand
High demand 18,000 pounds per year
25,000 pounds per year
35 pounds per year where EVJ= Expected Value of capacity alternative j
Pi = probability of demand level i
Ci = Financial result (cost, revenue or demand) at demand level i
- Total cost
TC= $35, 000+ ($1.6*)
Revenue R= ($14,400*$7) + ((*14,400)*2.9)
Profit Revenue cost high demand $63,800 medium demand.
- From the above results, it is clear that the worst financial for foster is when the demand is low because of profit in the case is $47,440, however if the demand happens to be high, the financial outcome would basically be significantly the best with profit of $69540. Basically the worst possible financial outcome is that when Robbie invests in the Roaster and demand is low, (18,000 pounds) he will make $47,440 on the other hand, the best possible financial outcome is that when Robbie invest in the roaster and the demand is high (35,000 pounds) he will basically make $69,540. This basically means that he is depending highly on the high demand of sales for him to make significant profits. Robbie should take into his consideration when making this decision the location of the roaster, capacity options, resources and logistics. Also, Robbie should consider that the difference between buying the roaster or not is only $240 for a year and buying the roaster will run about $35,000 a year.