Background

Mike Ibanez had a big decision to make. He had inherited his families vegetable business. Ibanez Produce grew, harvested, packaged, and sold produce. Mike was concerned because a large storm was approaching and he had to make a decision regarding his lettuce crop. Ibanez Produce had around 10,000 acres in cultivation and lettuce made up around 25% of the total crop value. Mike's concern was that the storm might bring severe winds and dust. Rain was not a major concern, but high winds and blowing dust reeked havoc on the lettuce crop. The high winds generally tear apart the lettuce and the dust renders the crop almost unsalvageable.

The Solution

From his Father's records, he had read that if he applied water combined with standard wax a residue would form on the lettuce and the crop could be saved. He knew that if the storm did come he could lose the whole crop if not protected. However, he didn't know how much the solution would cost him or how much he should pay.

The Outcomes

Mike knew that the storm had about a 50/50 chance of hitting. He also knew that if the storm did not hit and he did protect his crops the residue left might cause problems during harvest. After conversing with his Coop Extension officer, he had surmised that the probability of the residue causing problems was around 30%. If this problem did occur Mike would only get 80% of his normal crop.

Mike usually sold his lettuce with a $0.15 margin per pound. Normally the crop was around 800,000 lbs. If he did not protect his crop and the storm hit he maybe could salvage 10% of the lettuce. However, if he did protect and the storm did hit there was no guarantee that 100% of the crop would be saved.

In fact, from the information the Coop Extension officer had provided there was around a 60% chance that the he would lose part of his crop even if he did take protective measures and the storm hit. He surmised that three scenarios could occur in this case: a 90% salvage rate, a 75% salvage rate, and a 50% salvage rate. Mike thought these three scenarios had equal probability.

Mike's Decision Problem

Mike also knew that if he harvested right now he could make $0.05 margin on the total crop of lettuce. Overall operating costs were about the same in any situation. Mike needs to know if he should protect his crop and a starting point on what he should pay. Help Mike with his dilemma.

Discussion Questions:

1. What is Mike's expected gross revenue if he harvests now? What is his gross expected revenue if he does nothing and waits out the storm? What are the risks in choosing to harvest now or in waiting out the storm?

2. Is it a good idea for Mike to protect his crop? Why? What is the maximum that Mike should pay for the protection?

3. If the probability the storm would hit is 20%, what should Mike do? If the probability the storm would hit is 75%, what is Mike's best choice?

Requirements: In the presentation slides, you are required to provide a decision tree. Also, you need to provide a full sensitivity analysis for Question 3. Both presentation slides and Excel file (used to solve the problem using Treeplan) need to be submitted to Blackboard.