Question

Mr. Dobbs. Perkins, VP of Marketing, advises you that he is interested in expanding the production of yogurt by adding a range of 3 flavored yogurts. Dobbs is confident that he can sell flavored yogurt at a 50% price premium to plain yogurt. He has collected the following data and he would like your help in determining the best course of action.

Additional variable processing cost for flavor mixing $0.75 per unit

Materials cost - flavors and flavor stabilizers $0.95 per unit

Purchase of new processing line machinery $200,000 including installation

Annual membership fee - Iowa Chocolate Council $20,000

The new machinery is expected to be highly efficient, but its expected useful life is only 8 years, after which it will be scrapped. Salvage value is just 5% of the initial purchase price (including installation).

Q1. What would you recommend to Mr. Perkins and why?

Q2. Mr. Perkins also mentions that Mr. Jean St. Pierre, the President of the Iowa French-American Association, has advised him that there are a large number of French people in Iowa and other states who like the taste of yogurt made from unpasteurized milk. While it is allowable to sell unpasteurized milk in France, US Federal law does not allow it due to consumer safety concerns. The maximum penalty for selling unpasteurized dairy products is $25,000. Mr. Pierre has advised Mr. Perkins that he himself would pay a premium of at least 100% for unpasteurized yogurt, and he is confident that the Iowa market size would be at least 30,000 units per year and the US as a whole would be at least 200,000 units per year. Mr. Perkins has determined that Holstein would save $0.11 (power consumption and labor) per unit from skipping the pasteurization process. However, a new processing line would be required. The new machinery would cost $150,000 and its expected useful life would be 15 years, after which it will be scrapped. Salvage value is expected to 10% of the initial purchase price (including installation). What would be your advice to Mr. Perkins? Why?

Answer 1

1. Yes I would recommend MR.Perkins that he should go for the plan he is thinking off.

suppose the plain yogurts cost $ 20 then the flavored yoguts would be $30 as 50%rise in the flavoured yogurts and if he sells daily 100 yogurts then he earn $3000per day and monthly $90000 and yearly$ 32850000

and if we calculate the expenses also then flavour mixing cost is $0.75p.u i.e.$ 0.75*$100=$75*$30=$2250*$365=$821250

same as material cos flvours and flavou stabilizers cost i.e$ 0.95p.u then the cost per year would be $1040250

so if we calculate whole then $821250+$1040250+$20000+installation of machinery $200000=$2081500 that means he is gaining good ammount of profit per year .

so i would recommend he should go for the plan which he is thinking of.

2.no i would suggest not to go for unpasturized one as the law is not allowing it though mr .pierrie has told that he would pay the penalty but after starting may be they to shut down the company also and it is illegal as per us laws then he should nt go for it.