Case Scenario

Mr. House, the owner of Blue Mountain Eatery has been in business for 7 years. His eatery serves breakfast, lunch, and supper, as well as serving coffee for its customer. In addition to serving food and coffee, he sells specialty food items such as premium coffee.

In 2019, Mr. House sold 14,400 poundsof coffee in his coffee shop. He bought coffee at $3per pound and sold it for $7a pound.

Due to the good profit from premium coffee sale in 2019, Mr. House is considering investing in a large coffee roaster that can roast up to 40,000 pounds per year. By roasting coffee himself, Mr. House will be able to reduce his coffee costs to$1.6a pound. The challenge is that roaster itself is quite expensive; the fixed cost, which includes labor, training, power, and lease is $35,000 per year.

Note that the capacity of the roaster is much higher than the 14,400 pounds that Mr. House needs for internal sale in Blue Mountain Eatery himself. Therefore, he will be able to sell to the other restaurantsat $2.9 a pound. He has identified three scenarios for demand as shown in Table 1

DEMAND	POUNDS PER YEAR	PROBABILITY
Low Demand	18,000	33.33%
Medium Demand	25,000	33.33%
High Demand	35,000	33.33%

It is important to note that the numbers in table 1 include the 14,400 pounds that Mr. House sells in his own eatery.

Case Scenario Questions

1. What are the expected values for the two capacity options? (do the

calculations for each option). After you completed the calculations, update the decision tree to present your results.

a.Note that for the second option (investing on a roaster), any demand beyond 14,400 pounds will only generates $2.9 revenue per pound.

2. Describe the best and worst financial result for Mr. House.

3. Describe other considerations for Mr. House decision making including strategic flexibility and core competency.