Transcript Corn Products

Benderson
Consulting Case
Student Coaching
Notes
Top Ten LDC Concepts in
Case
 Micro:
#1: Opportunity cost
 Micro: #2: Comparative advantage
 Micro: #4: How prices affect resource
allocation.
 Management Accounting: #8. How to use
cost data in decision-making. What is
relevant?
 Statistics: # 5. The concept of expected value
and how to calculate it
Case Facts – Key Players
 Belgrove
Farms – Client
– Robert Belgrove – CEO
– Kevin Thorp – Operations Manager
 Benderson
Consulting
– Marna Kim Team Leader
– You are part of Marna’s team
Case Facts – Overview
Belgrove Farms owns four different fields and grows AA
Corn
 Thorp wants Belgrove Farms to switch to GM Corn
 His profit analysis is contained in Exhibit 1

– Is based on a price of $2.20 for GM corn
– Assumes entire acreage is devoted to either AA or GM corn
– Ignores price uncertainty of GM corn
Productivity differs across farms (See Exhibit 2)
 Belgrove’s income statements are available (See Exhibit 3)
 Forecasted price for GM corn (See Exhibit 4)

Case Facts: Price Data
 AA
Corn is expected to sell for
$ 5.00/bushel
 GM
Corn has two possible prices.
– GM Corn: $ 5.50/bushel
– GM Corn: $ 4.70/bushel
Case Facts – Key Issue
What
field?
type of corn to plant in which
– How to deal with the uncertainty around GM
corn’s prices?
– What is differential profit from the
recommended growing strategy?
When Does BF Know Prices?

Assumption: Prices revealed before planting decision
Today
Actual Outcome
Action Date
Analysis being done
Prices of GM corn known
Planting decision made
Belgrove Farms is a Price
Taker Firm (Most
Competitive Market)
 Belgrove
Farms is one of thousands of
firms producing the same product.
 As
such, they have no market power to set
price, but take the price from the market.
 The
market price is determined by the
interaction of all the buyers (demand) and
sellers (supply) of yellow corn.
Economic & Accounting
Concepts of Profit
 Business
firms attempt to maximize
economic profit. ()
  = Total Revenue – Total Economic Cost
 Total Revenue = Price x Quantity
 Total Economic Cost = the Opportunity
Cost of the resources used in production
 Accounting Profit = Total Revenue – Total
Variable and Fixed Costs
 Incurred Cost is the actual amounts paid or
obligations entered into for future payments
Comparative Advantage
A
resource (farm) has a comparative
advantage in the production of a good (GM
corn) if it has the lowest opportunity cost of
production
 The
four farms have differing relative
abilities to produce AA or GM corn
 The
production decision should compare
each farm’s gain (contribution margin) with
the opportunity cost of production
Opportunity Cost of Production
 The
opportunity cost of any output is the
value of the best alternative given up
 The
economic (opportunity) cost of
producing GM corn depends on the
amount of AA corn given up and the
contribution margin from producing AA
corn
Cost Classifications
Variable costs -- those that change with change in
activity levels (e.g., units produced, service provided)
in an organization
 Fixed costs -- those that do not vary with the activity
level
 Incremental costs - the change in costs associated
with changing the output above some base level or
selecting one course of action over another
 Relevant costs - those costs that differ across
alternative courses of action
 Opportunity costs - the benefit foregone by not using
a limited resource in its best alternative use
