Reid’s Raisin Company

Located in wine country, Reid’s Raisin Company (RRC) is a food-processing firm that purchases surplus grapes from grape growers, dries them into raisins, applies a layer of sugar, and sells the sugar-coated raisins to cereal and candy companies. At the beginning of the grape-growing season, RRC has two decisions to make: what cost to contract for grape purchases (which are delivered in the autumn), and determining how much to charge for the sugar-coated raisins it sells.

RRC’s customers buy raisins in price-dependent quantities. Based on prior years’ experience, Mary Jo Reid, RRC’s general manager, believes that if RRC prices the sugar-coated raisins at $2.20 per pound, the processors’ orders will total 750,000 pounds of sugar-coated raisins. Furthermore, demand will increase by 15,000 pounds for each penny reduction in sugar-coated raisin price below $2.20. The same relationship holds in the other direction: demand will drop by 15,000 for each penny increase. The price of $2.20 is a tentative starting point in the negotiations.

Sugar-coated raisins are made by washing and drying grapes into raisins, followed by spraying the raisins with a sugar coating that RRC buys for $0.55 per pound. It takes 2.5 pounds of grapes plus 0.05 pound of coating to make one pound of sugar-coated raisins, the balance being water that evaporates during grape drying. In addition to the raw materials cost for the grapes and the coating, RRC’s processing plant incurs a variable production cost, which includes labor, of $0.20 to process one pound of grapes. RRC also incurs fixed (overhead) costs in its grape-processing plant of $200,000 per year.

Mary Jo has asked you to analyze the pre-tax profit for this situation in order to guide her in the upcoming negotiations. Her goal is to examine the effect of various “what-if” scenarios on RRC’s profits. As a basis for the analysis, she suggests using a contract price of $0.25 along with the selling price of $2.20 for sugar-coated raisins.

Tasks:

1- Answer the following questions:

A- What is the problem statement?

B- Do you need to make any assumptions about this problem?

2- Create a sketch of the spreadsheet. Clearly define all parameters, decisions, calculations/relationships, and outcomes in the problem. Be as explicit as possible with calculations