Q2. After reading CASE STUDY (Forsters Market on pp. 174), you need to answer three questions (below).

a (3 points). What are the two capacity options that Robbie needs to consider? What are their fixed and variable costs?

b (3 points). What is the indifference point for the two options? What are the implications of the indifference point? (e.g., what is your decision to choose one capacity option before the indifference point and after the indifference point?)

c (4 points). Calculate the expected value for the two capacity options based on three demand levels (e.g., low, medium, and high demand). Robbie thinks the probabilities of all three demands are equally likely. Keep in mind that, for the roaster option, any demand above 14,400 pounds will generate revenues of only $2.90 a pound.

CASE STUDY Low demand Medium demand High demand 18,000 pounds per year 25,000 pounds per year 35,000 pounds per year 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. These numbers include the 14,400 pounds sold at For- ster's Market. In addition, Robbie thinks all three scenarios are equally likely 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 indus- trial-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 $1.60 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 a 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 $2.90 a pound. Robbie has outlined three possible demand scenarios