Question

2. Airbiz Food Products produces a wide variety of food and related products. The? company's tomato-canning operation relies partly on tomatoes grown on Airbiz?'s own farms and partly on tomatoes bought from other growers. Airbiz?'s tomato farm is on the edge of? Sharpestown, a? fast-growing, medium-sized city. It produces 14 million pounds of tomatoes a year and employs 58 persons. The annual costs of tomatoes grown on this farm are as? follows:

Variable production costs $605,000

Fixed production costs 1,250,000

Shipping costs (all variable) 230,000

Total costs $2,085,000

Fixed production costs include depreciation on machinery and? equipment, but not on land because land should not be depreciated. Airbiz owns the? land, which was purchased for $600,000 many years ago. A recent appraisal placed the value of the land at $30 million because it is a prime site for an industrial park and shopping center. Airbiz could purchase all the tomatoes it needs on the market for $0.30 per pound delivered to its factory. If it did? this, it would sell the farmland and shut down the operations in Sharpestown. If the farm were? sold, $325,000 of the annual fixed costs would be saved. Airbiz can invest excess cash and earn an annual rate of 12%.

1. How much does it cost Airbiz annually for the land used by the tomato? farm?

2. How much would Airbiz save annually if it closed the tomato? farm? Is this more or less than would be paid to purchase the tomatoes on the? market?

3. What ethical issues are involved with the decision to shut down the tomato? farm?

Answer 1