Agribiz Food Products, Inc. produces a wide variety of food and related products. The company’s tomato canning operation
relies partly on tomatoes grown on Agribiz’s own farms and partly on
tomatoes bought from other growers.
Agribiz’s tomato farm is on the edge of Sharpestown, a fast-growing and
medium-sized city. The farm produces 8 million kilograms of tomatoes a year and
employs 55 persons. The annual costs of tomatoes grown on this farm are:

Fixed production costs include amortization on machinery and equipment,
but not on land, because land cannot be amortized. Agribiz owns the land, which
was purchased for $600,000 many years ago. A recent appraisal placed the value
of the land at $15 million because it is prime land for development of an industrial
park and shopping centre.
Agribiz could purchase all the tomatoes it needs on the market for $0.25 per
kilogram delivered to its factory. If it did this, it would sell the farmland and shut
down the operations in Sharpestown. If the farm were sold, $300,000 of the
annual fixed costs would be saved. Agribiz can invest excess cash and earn an
annual rate of 10 percent.
1. How much does it cost Agribiz annually for the land used by the
tomato farm?
2. How much would Agribiz save annually if it closed the tomato farm?
Is this more or less than would be paid to purchase the tomatoes on
the market?
3. What ethical issues are involved with the decision of whether to shut
down the tomato farm?

Transcribed Image Text:

Variable production costs Fixed production costs Shipping costs (all variable) Total costs $ 550,000 1,200,000 200,000 $1,950,000