HCYE has been in the yogurt business for a couple of years now. In the past annu

Question

HCYE has been in the yogurt business for a couple of years now. In the past annual financial period they sold 14,400 pounds of yogurt. By converting everything to pounds they have determined that they huy the yogurt for $3.00 per pound and sell it for $7.00 per pound. Although they have been quite saccessful they are now considering purchasing a yogurt churner that will allow them to make their own yogut. This churner is capable of producing 40,000 pounds of yogart per year By making the yogurt themselves IHCYE can redace their yogurt costs to $1.60 per pound. HCYE also knows that there is considerable cost relalcd to the churner such as fixed costs for training, lcasectc. that will run about $35,000 per ycar This chumer will be able to produce significantly more than the 14,400 pounds that they currently sell on Campus. After evaluating some options HCYE feels they can sell some of their yogurt to other local shops for $2.90 per pound. HCYE has calculated the three demand possibilities all of which have an equal probability of occurring Low Demand 18,000 pounds per year (ineludes the 14,400 pounds for campus) Medium Demand 25,000 pounds per year (includes the 14,400 pounds for campus) High Demand 35,000 pounds per year (includes the 14.400 pounds for campus) 1. What are the two capacity options that HCYE nceds to consider? 2. What are the fixed and variable costs for cach? 3, What is the indifference point for the two options? 4. What are the implications for the indifference point? Draw and properly label the Decision Tree for the churner decision 6. IfHCYE does not invest in the churner do they need to concern themselves with the different demand scenarios shown above? Why or Why not? Explain 7. Calculate the expected valuc for the two capacity options. Don't forgct that for the churner option any demand above 14,400 pounds will generate revenues of only $290 per pound 8. Update the Decision Tree to include these new results 9. What is the worst AND best possible financial outcome for HCYE 10. What other factors such as core

Explanation / Answer

1. The options available are

2.

3 and 4 .

So, profit P1 = P2

So, 4V = (7-1.6)*14400+(2.9-1.6)*(V-14400)-35000

So 4-1.3 V = 77760 - 18720 - 35000

2.7 V = 24040

V = 8903 (As less than 14400) not acceptable.

So now

4v=5.4V-35000

35000=1.4 V

V = 25000 (Even this is not acceptable as the value should be within 14400)

So there is no value at which the scenario has an indifference point.

For theoretical reasons.

V = 25000 (Makes sense, if the demand is more than 14400) then selecting any of the options there is no difference in the profit made.

Old economics Cost per pound 3 SP per pound 7 Quantity pounds 14400 Total cost 43200 Total revenue 100800 Profit 57600 Profit P1 = 4V

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