Belgrove Farms Case Coaching Notes

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Belgrove Farms CaseCoaching Notes
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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

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Case Facts Key Players

• Belgrove Farms Client
• Belgrove -- CEO
• Kevin Thorp Operations Manager
• Benderson Consulting
• Marna Team Leader
• You are part of Marnas team

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Case Facts Overview

• Belgrove Farms owns 4 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)
• Belgroves income statements are available (See
  Exhibit 3)
• Forecasted price for GM corn (See Exhibit 4)

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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

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Case Facts Key Issue

• What type of corn to plant in which field?
• How to deal with the uncertainty around GM corns
  prices?
• What is differential profit from the recommended
  growing strategy?

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When does BF know prices?

• Assumption Prices revealed before planting
  decision

Action Date Planting decision made
Today Analysis being done
Actual Outcome Prices of GM corn known
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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.

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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

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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

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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

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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