Tim Horton’s purchases and roasts highquality
whole bean coffees and sells them, along with other coffee-related products,
primarily through its company-operated retail stores. The company is
known for its high-quality coffees.
Suppose that the quality control manager at Tim Horton’s discovered a
1,000 kilogram batch of roasted beans that did not meet the company’s quality
standards. Company policy would not allow such beans to be sold with the Tim
Horton’s name on it. However, it could be reprocessed, at which time it could be
sold by Tim Horton’s retail stores, or it could be sold as-is on the wholesale coffeebean
market.
Assume that the beans were initially purchased for $2,000, and the total cost
of roasting the batch was $1,500, including $500 of variable cost and $1,000 of
fixed costs (primarily amortization on the equipment).
The wholesale price at which Tim Horton’s could sell the beans was $2.75 per
kilogram. Purchasers would pay the shipping costs from the Tim Horton’s plant to
their warehouses.
If the beans were reprocessed, the processing cost would be $600 because
roasted beans would not require as much processing as new beans. All $600 would
be additional costs, that is, costs that would not be incurred without the reprocessing.
The beans would be sold to the retail stores for $3.70 per kilogram, and Tim
Horton’s would have to pay an average of $0.20 per kilogram to ship the beans to
the stores.
1. Should Tim Horton’s sell the beans on the market as-is for $2.75 per
kilogram, or should the company reprocess the beans and sell them
through its own retail stores? Why?
2. Compute the amount of extra profit Tim Horton’s earns from the alternative
you selected in requirement 1 compared to what it would earn
from the other alternative.
3. What cost numbers in the problem were irrelevant to your analysis?
Explain why they were irrelevant.