Question

Assuming the probabilities of alternative prices for GM yellow corn are as stated in Exhibit 4,
calculate the expected change in profits from adopting our recommendation. (This is important since
it can be used to justify our consulting fees.)

Exhibit 4: Marketing and Price Analysis

Mercer Farms Group - Marketing Division

Background: The Marketing Division was asked to analyze the expected prices and probabilities for AA yellow corn and Genetically Modified (GM) yellow corn for the summer harvest.

Analysis: Estimating the future demand and supply of the commodity derives the projected market prices. The factors considered in the demand portion of this analysis include population growth, consumer preferences, and income. Relative prices of substitutes and complements were considered as static or unchanged. The supply portion of the analysis considered current input prices, existing technology, existing stocks on hand (domestic and foreign), and government policies (domestic and foreign). Exchange rate estimates were taken from our International Division’s current forecast.

Price Forecast:

AA Yellow Corn (domestic): Price per bushel: $ 5.00.

GM Yellow Corn (domestic):

Two alternative price scenarios should be considered. The demand acceptance of GM products in general is in question. There have been numerous reviews by governments all over the world, but particularly in Europe.

Scenario #1: Price of GM Yellow Corn (domestic): $ 5.50. Europe adopts few restrictions on the importation of GM products, but prohibits European production.

Scenario #2: Price of GM Yellow Corn (domestic): $ 4.70. Europe adopts heavy restrictions on the importation of GM products.

At this time, we consider the probabilities to be: Scenario #1: 60%; and Scenario #2: 40%.

The futures markets will have determined which price will occur before it is time to plant the summer crop.

Answer 1

Business report regarding replacing the production of Grade AA yellow corn crop with Genetically Modified (GM) yellow corn by Mercer Farms

A few parameters to be considered while changing the cropping pattern can be as follows:

1) Experience in the given business : The firm has rich experience in the given field of production of yellow corn so its a favorable aspect of the proposal.

2) Financial paratemeters : Here we see that increase in cost of production per bushel if we change to GM yellow corn is $ 0.55 which amounts to total rise in cost of production by $ 785,125. Further if we cosider the cost of availing finance for this additional cost say at 8% per annum the actual additional cost would be 1.08 * =$ 847,935 and thus actual increase in profit as per above calculation would be $ 355815.

The sale price of GM yello corn is shown as $ 5.5 which has probability of 60% and $ 4.7 which has probability of 40 % so if we want to have a better decision we need to weigh both the probilities so the probable sale price of GM yello corn can be $ ( 5.5*0.6 + 4.7*0.4 ) =$ 5.18 Further we consider the sale price of 5.18 our total revenue will be $ 2,499,350 and incresed profit $ 264,225. Besides this when cost of availing finance is considered the increased profit comes down to $ 201,415.

3) Technical Aspects : Here the expectations on yeild from GM yellow corn is kept quite high as follows: (a) for Adems the production is expected to change from 100 bushels per acre to 110 bushels per acre (b) for Baker the production is expected to change from 100 bushels per acre to 101 bushels per acre (c) for Chase the production is expected to change from 200 bushels per acre to 300 bushels per acre and (d) for Dutson the production is expected to change from 200 to 400 bushels per acre which seems a bit not justifiable to if we consider on an average rise in production at 40% we will get the production of GM yellow corn for next year 406,000 which will yield revenue of $ $ 2103080 if sold at $ 5.18. Further if we consider the cost of finance i.e. $ 62858 and keeping the cost of same i.e. $ 1568125, we get the total profit as $ 534955 and which is decline in profit of $132045.

4) Managerial Aspects : The change in production would need additional cost which is not considered in the given exhibits.

Given the above mentioned facts following risks should be considered while chaning the production.

1) Market acceptance : The strong evidence should be considered that new product would be well accepted in the market.

2) Sales arrangmenet : The firm must have the disrtibutors / purchasers into confidence before changing the pattern.

3) Legal requirment : For GM yellow crop all the necessary clearances if any need to be obtained and the associated cost for the same need to be considered.

4) Competitors study : A study needs to be carried out if there are other firms in the production of GM yellow corn and suitable base for such study needs to be established.

Recommandtions : Considering the factors like cost of additional finance needed, basis of enhanced production with GM, market acceptance and rationlization of sale price as mentioned above the changing production to GM yellow corn is not advisable at present as it will lead to decline in the existing profit as mentioned under Financial parameters.