John Wyatt is a buyer of fruit products at Fresh Fruit, LLC, a major U.S. food processing company. This company, based in California, uses a wide variety of fruit concentrates, purees, flavors, and extracts in many of its popular food products. One of Johns responsibilities is to negotiate annual purchase contracts for these ingredients with suppliers in western U.S. and Asia. One such ingredient, pineapple juice, is grown and harvested on a seasonal basis in various countries around the world.

John is currently examining the costs associated with using one of his existing suppliers, a Philippine grower/processor. Fresh Fruit has used this suppliers high-quality juices for many years. Farmers grow pineapple in a remote area of the Philippines and transport it to a processing plant where the juice is processed and packaged for shipment. This variety of pineapple is highly prized for its flavor. Unfortunately, guerilla activity by rebels has caused some problems for growers in this part of the Philippines.

The supplier aseptically packages the pineapple juice (currently priced at $0.29/pound, FOB vessel) in foil bags (one bag per box), each containing 50 pounds of juice. The boxes are stacked on pallets, 30 per pallet, for loading into 40-foot containers. Each container holds 20 pallets and is shipped to Long Beach, California via an ocean container ship. The ocean freight charge is $5,000 per container. Import and customs taxes on pineapple juice is 12% of the shipments original price ($0.29/lb). Long Beach port charges are $750 per container. Transportation charges from the Long Beach port to a local warehouse are $250 / container. Fresh Fruit requires one container shipment per month.

Fresh Fruit warehouses each container in a public warehouse until needed for processing (average storage is one month). The monthly storage fee is $6.50 per pallet. In addition, the warehouse charges a one-time in/out fee of $8.00 per pallet to cover administrative costs. Demand is relatively consistent over the year.

When pineapple juice is required at Fresh Fruits plant, a local freight company moves the container from the warehouse, which costs $175 per container. The company estimates that incoming receiving and quality control procedures cost $5 per pallet. Because of the long cycle time from the processing plant in the Philippines to Fresh Fruits plant, the company estimates that it incurs a loss of 2 percent of the total pineapple juice purchased.

The factory yield of the pineapple juice when blending into Fresh Fruits products is 99%, which means that the company wastes 1 percent of the juice during production.

Occasionally, undetected spoilage of pineapple juice requires removal of the product from grocer shelves. Out-of-pocket costs to Fresh Fruit are $25,000 per incident, which is not recoverable from the Philippine supplier. This occurs about once every six months.

Answer the questions on the following page:

Calculate the total cost of pineapple juice for Fresh Fruit per pound, per pallet, and per container.

You do not have to calculate a column for cost of pineapple juice per bag/box.

Make sure you include the cost of spoilage ($25,000 every six months), as well as loss in storage and production.

Give the percent of the total cost that each cost category represents.

Fresh Fruit current pays its suppliers 17.40 PHP (Philippine Peso) at an exchange rate of 60 PHP to 1 USD (U.S. Dollar). Due to a severe economic downturn in the Philippines, however, the peso is expected to substantially weaken against the dollar. The consensus forecast is that over the next year, the average exchange rate will be 65 PHP to 1 USD.

Copy your original TCO model onto a separate sheet in your excel workbook.

Expand your model to incorporate an exchange rate.

Calculate the total cost with the forecast exchange rate of 65 PHP to 1 USD.

What is the difference in total cost between your original model and the new model that uses the 65 PHP to 1 USD. Provide your answer both in terms of change in dollar amount and percentage change.

Fresh Fruit wants to decrease the total cost of pineapple juice.

Identify two costs areas other than price that Fresh Fruit to focus on to decrease total cost. Explain why you choose those cost areas.

Suppliers are contractually obligated to sell Fresh Fruit pineapple juice at a price of 17.40 Philippine Peso (PHP) per pound. However, to maintain their farms, suppliers need U.S. dollars (USD) to buy materials and other requirements on international markets. So instead of paying their suppliers in PHP, Fresh Fruit pays their suppliers the dollar equivalent of 17.40 PHP. This means that, at the current exchange rate of 60 PHP to 1 USD, Fresh Fruit pays its suppliers $0.29 USD. The Chief Financial Officer at Fresh Fruit wants to renegotiate its contract with suppliers to lock in the new forecast exchange rate of 65 PHP to 1 USD.

Describe any ethical concerns that Fresh Fruit needs to consider before it decides to lock in the new forecast exchange rate.

Provide an alternative proposal that would address the ethical concerns that you described above.

Note: You do not have to work through the full ethics framework for this question. Just discuss ethical concerns and an alternative proposal.

Fresh Fruit is evaluating a new quality process to reduce spoilage at the customer. Quality Control per pallet will increase to $16. However, the anticipated spoilage cost will decrease by 25%. For your analysis, please assume the current exchange rate of 60 PHP to 1 USD. Should Fresh Fruit implement this new Quality Control process? Show your work in your Excel file.