Submitted To: Professor D. Cook
Submitted By: Group 3
The VP of Operations of Cadman Foods faces the decision of having to allocate three million pounds of tomatoes to the production of canned whole tomatoes, tomato juice or tomato paste. Subsequent to that decision, the VP needs to determine whether to acquire 80,000 pounds of additional “A” quality tomatoes at $0.425 per pound. Bill Cooper, the Controller at Cadman Foods has recommended that Cadman produce the maximum quantity of canned whole tomatoes based on Dan Tuckers assessment of the tomato crop. By logical extrapolation, this would result in the remainder of the crop being allocated to the production …show more content…
In essence, 8000 cases greater than the expected demand, the alternative would be that 200,000 pounds of tomatoes would remain unused as we have assumed that we cannot sell unused tomatoes. Additionally production costs of $9.75/case would be avoided by not processing the 200,000 pounds of “B” quality tomatoes to produce tomato paste beyond demand.
In addition to the oversight of potentially producing too much paste or having excess unusable tomatoes, Bill also made an error in judgment in including the cost of fruit in his contribution calculation. By not using all the tomatoes available, Bill’s calculations did not account for the cost of the 200,000 pounds of tomatoes left unallocated. In much the same manner allocated overhead should have been applied after the net contribution was calculated. Bill’s expected profit calculation can be summarized as follows:
Net Profit=CAWUAW+CBWUBW+CAJUAJ+CBJUBJ + CAPUAP+CBPUBP=$74,666.67
Figure [ 4 ]: Bill Cooper's Net Profit Calculation
As mentioned above it is important to note that the net profit does not take into account the $60,000 cost of the unused tomatoes.
In pursuing Bill Cooper’s strategy and correcting for the missing fruit cost discussed previously, Cadman could expect gross profit before allocated