Case Study

Forster's Market

Introduction

Forster's Market is a retailer of specialty food items, including premium coffees, imported crackers

and cheeses, and the like. Last year, Forster's sold $14,400$ pounds of coffee. Forster's pays a local

supplier $$3$ per pound and then sells the coffees for $$7$ a pound.

The Roaster Decision

While Forster's makes a handsome profit on the coffee business, owner Robbie Forster thinks he

can do better. Specifically, Robbie is considering investing in a large industrial$-$sized coffee roaster

that can roast up to $40,000$ pounds per year. By roasting the coffee himself, Robbie will be able to

cut his coffee costs to $$1\mathrm{.}60$ a pound. The drawback is that the roaster will be quite expensive;

fixed costs $($including the lease, power, training, and additional labor$)$ will run about $$35,000$ every

year.

The roaster capacity will also be significantly more than the $14,400$ pounds that Forster's needs.

However, Robbie thinks he will be able to sell coffee to area restaurants and coffee shops for $$2\mathrm{.}90$

a pound. Robbie has outlined three possible demand scenarios:

These numbers include the $14,400$ pounds sold at Forster's Market. In addition, Robbie thinks all

three scenarios are equally likely.

Questions

Draw the decision tree for the roaster decision. If Forster's does not invest in the roaster,

does Robbie need to worry about the different demand scenarios outlined above? Why

or why not