Belgrove Farms Case

Coaching Notes

Top Ten LDC Concepts in Case

Micro: #1: Opportunity Cost. Micro: #2: Comparative Advantage Micro: #4: How prices affect resource

allocation. MA : #8. How to use cost data in

decision-making. What is relevant? SOM : # 5. The concept of expected

value and how to calculate it

Case Facts – Key Players

Belgrove Farms – Client– Belgrove -- CEO– Kevin Thorp – Operations Manager

Benderson Consulting– Marna Team Leader– You are part of Marna’s team

Case Facts – Overview

Belgrove Farms owns 4 different fields and grows AA Corn

Thorp wants Belgrove Farms to switch to GM Corn His is profit analysis is contained in Attachment 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 Attachment 2) Belgrove’s Income statements are available (See

Attachment 3) Marna wants her team to analyze various issues (See

Attachment 4) Forecasted price for GM corn (See Attachment 5)

Case facts: Price Data

AA Corn is expected to sell for $ 2.00/bushel

GM Corn has two possible Prices with equal probability.– GM Corn: $ 1.90/bushel– GM Corn: $ 2.20/bushel

Case Facts – Key Issue

What type of corn to plant in which field?–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?

Action DatePlanting decision

made

Assumption: Prices revealed before planting decision

TodayAnalysis being

done

Actual Outcome

Prices of GM corn known

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 farms 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

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

Cost Classifications