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The Bloomfield Farm Supply case requires
that you apply your knowledge of variable costs and the use contribution margins
in a relatively simple and very practical setting. Fred Bloomfield is facing
increased price competition and has to decide what to do about prices for bulk
fertilizer for the coming year. Your assignment for the Bloomfield Farm Supply case is to
prepare a report to Frank Bloomfield outlining his options and the potential
consequences of those options. Your assignment questions are as follows:
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Consider Fred's alternative courses of
action: hold the price at $240/tonne, or reduce his price to $224/tonne.
What are the best and worst case outcomes he can expect? Note that there
are four combinations of price/volume outcomes here. Set up a 2 x 2
matrix like the one suggested for requirement 1, below, to summarize your results. [Hint: Assume that he could achieve
the implied 1981 volume if he reduced the price, and that the 15% increase would be in reference
to that 1981 volume. The 15% decline in volume would be with reference
to the 1982 volume.]
Fred wants your assistance with the
bad debts problem. How serious is the bad debts problem for Fred? Assume
that the bad debts discussed on page 2 were associated with “typical”
orders; in other words, these are representative of Fred’s fertilizer
business. How much more fertilizer [either in orders or
tonnes] does Fred have to sell to make up for one farmer
whose fertilizer bill turns out to be uncollectible? Note that there
were two accounts written off during 1982. Assume for the purposes of
this analysis that each account written represents 50% of the total bad
debt write-off, and
assume that each represented a single order [i.e., the farmer ordered
$36,000 worth of fertilizer all at once]. Assume that the cash cost
associated with any one order is equal to the variable cost of the
order. Set up a
matrix like the one suggested for requirement 2, below, to summarize your results.
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Look at Fred’s sales of “other” items
[column 2 on page 4]. Assume for the purposes of this part of the
analysis that the contribution from these sales is essentially static at
the 1982 level [i.e., he can do little in the short run to influence
either sales volume or relative profits on these items]. Calculate the
number of tonnes of fertilizer Fred will have to sell to break even
after the impact of sales of “other” items. In
other words, take the contribution from the "other" sales as GIVEN at
the 1982 amount. Hint: Set up a matrix
matrix like the one suggested for requirement 3, below, to summarize your results -
Consider Fred’s situation vis-ŕ-vis Agpro. From the
description in the case, what does it sound as though Agpro is trying to do?
Is this a problem for Fred? Why or why not? Is there anything Fred should
consider doing [other than messing with the fertilizer price] to counteract
the competitive moves by Agpro?
Suggested formats for summarizing your results to
requirements 1, 2,and 3:
Submission requirements:
Hardcopy due at the start of class
on March 24th, 2011. Include a
one page
summary of your results and recommendations to Fred, along with a
well-formatted printout of your Excel analysis.
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