Belgrove Farms Inc.

Tontz, Richard ; Rymsza, Leonard ; Marcal, Leah 等

CASE DESCRIPTION

The primary subject matter of this case focuses on the calculation and use of comparative advantage in the allocation of resources within the firm. Secondary issues involve the use of accounting techniques and statistics to complete the business decision analysis of a profit opportunity. The case also presents strategic thinking and ethical issues related to business conduct in a family firm and the effects on consumers.

The case has a difficulty of level three, appropriate for junior level courses. The case is intended to be taught in three class hours, including a class presentation by student teams. The case is expected to require a minimum of three hours of outside preparation by student teams that present a report.

This case is designed for use in an upper-division, inter-disciplinary business course. The purpose of the course is to enable students to utilize the knowledge they have gained in their lower-division core business courses that include one economics course in microeconomics and two accounting courses (one course in financial accounting and one course in managerial accounting) and one statistics course.

Specifically, the case incorporates the understanding of comparative advantage, opportunity cost and how prices affect the allocation of resources, how cost data should be used in decision making, and the calculation of expected value.

CASE SYNOPSIS

Students are faced with a factual setting that presents practical business and ethical issues. The client, Belgrove Farms, is considering changing production from standard yellow corn to genetically modified corn. The farm has four sub-divisions that vary in production of the new product. Cost data is provided by an existing proposal. Future pricing of the genetically modified corn is uncertain. Using the concept of comparative advantage, the student must choose the appropriate allocation of production among the four sub-divisions, and calculate the anticipated change in profits. Students must also consider the nature of a family firm and any strategic or ethical issues associated with the proposed change in production.

BELGROVE FARMS INC.

As a junior analyst for Benderson Consulting (Benderson), you were looking forward to an exciting career. You imagined assignments evaluating new technologies in far-off, exotic locations. As your bus traveled through the heartland of U.S. cornfields, you wondered about your job choice. Your background research, however, has changed your first impression of being assigned to an agricultural consulting engagement. You have discovered that farming is no longer a small potatoes operation. Perhaps, given the changes in the size of farming businesses in the U.S., agribusiness might be a lucrative consulting specialty.

Belgrove Farms Inc. (hereinafter referred to as Belgrove Farms) is an old, family-owned business that has acquired various smaller farms over the years and has managed to maintain a profitable business enterprise through economies of scale. So far, the firm has specialized in the production of Grade AA yellow corn. Kevin Thorp, Operations Manager for Belgrove Farms, has proposed replacing the current production of AA yellow corn with a new genetically modified (GM) variety of yellow corn (see Exhibit 1).

Robert Belgrove, CEO of Belgrove Farms, engaged Benderson to evaluate Mr. Thorp's proposal and make recommendations. Marna Kim, the Senior Financial Analyst at Benderson, has assigned your team the task of evaluating the Thorp proposal. Ms. Kim has sent your team a memo (see Exhibit 4) outlining the major points she would like your team to consider.

The firm's research staff has pulled together information regarding the new product (see Exhibit 2) and the past two year's income statements for Belgrove Farms (see Exhibit 3). Your team has a few days to review the materials and prepare its preliminary analysis before meeting with the client

Required:

Using the memo from Marna as a guide, prepare a business report to the client setting forth your team's analysis and recommendations. Be sure to answer the questions found in the memo. In the report, address any risks associated with the recommendations. The team will also deliver its analysis and recommendations in a formal, personal presentation to the client.

ACKNOWLEDGMENT

Our thanks to Dr. Janice Bell for her assistance with the accounting aspects of the case.

Exhibit 1: Thorp Proposal Letter

Belgrove Farms Inc. 17342 Mendow Circle, San Jose, CA 95129
Phone (408) 555-CORN

January 10, 20xx (1)

Mr. Robert Belgrove
124 East Ocean Ave.
Santa Barbara, CA 93105

Dear Uncle Bob:

As we discussed last fall, I have been looking into switching the
company's output from Grade AA yellow corn to a new strain of
Genetically Modified (GM) yellow corn. I think you will be pleased
with the following results of my analysis and the potential impact
on our profitability.

Output and Revenue Analysis:

Based on our output from last year, if we plant Grade AA yellow
corn again we can anticipate:

Total Revenue (TR) = $ 1,450,000 (290,000 x $ 5.00)

If we switch to the new GM yellow corn:

Total Revenue (TR) = $ 2,653,750 (482,500 x $ 5.50)

As you can see, our output would increase and the GM yellow corn
is of somewhat higher quality generating a higher anticipated price.
This change would increase output by 192,500 bushels or 66% and
increase TR by $ 1,203,750.

Cost Analysis:

Our average production cost was $ 2.48 per AA yellow corn bushel this
past year. We estimate it will be $ 2.70 per AA yellow corn bushel this
year. If we switch to GM yellow corn, our processing, overhead and
planting expenses will not change, but the increased price of GM
yellow corn seed will raise average production cost per bushel to
$ 3.25.

AA yellow corn Cost: 290,000 x $ 2.70 = $ 783,000.
GM yellow corn Cost: 482,500 x $ 3.25 = $ 1,568,125.
Increased Cost: $ 785,125.

Profit Analysis:

Increased total revenue = $ 1,203,750
Increased cost = $ 785,125
Increased profit: $ 418,625
Total Profit: $ 1,085,625

I hope you are as excited about this potential as I am. There has
been some bad press about the genetically modified products in Europe,
but I think that's just the usual fear of new technologies.

Sincerely,

Kevin

Kevin P. Thorp
Operations Manager
Belgrove Farms Inc.

(1) Let 20xx = current year.

Exhibit 4: Marna Kim's Memorandum

Memo

To: All Student Teams, Benderson Consulting

From: Marna P. Kim, Senior Financial Analyst, Benderson Consulting
MPK

Date: February 2, 20xx.

Re: Belgrove Farms Inc.

Please forgive my generality, but since I don't know at the moment
which team will be doing this research, I have laid out a brief
outline of the major points I think should be considered in
evaluating the proposal of Mr. Kevin Thorp, the Operations Manager,
at Belgrove Farms Inc.

Background: Robert Belgrove, a conservative older gentleman who
founded the firm, is the client. He is very proud of the firm's
commitment to quality. Kevin Thorp, a nephew of Mr. Belgrove, was
hired by him two years ago. Kevin is 27 and recently graduated from
a state university with a business degree.

Q. 1. Belgrove Farms has four sub-divisions (four different farms
it has previously acquired). Since the farms have different
relative productive abilities (AA yellow corn vs. GM yellow corn),
and production can be shifted by farm, consideration must be given
to the best combination of outputs to maximize the economic profit.

a. Calculate the output of each farm for AA yellow corn or GM
yellow corn. From this data, calculate the economic cost of AA
yellow corn in terms of GM yellow corn (ratio) and the economic
cost of GM yellow corn in terms of AA yellow corn (ratio) [i.e., 1
AA = [?.bar] GM; or 1GM = [?.bar] AA.]

b. Our marketing division has put together a projection of expected
selling prices (see Exhibit 5). Apparently there are some consumer
issues about the new corn. These issues may affect the expected
selling price of GM yellow corn. Evaluation of some alternative
prices for GM yellow corn may be in order.

c. Combine the relative output ratios from Q.1.a. with the selling
prices from Q.1.b. to determine an optimal output table at each
selling price of GM yellow corn.

(Remember opportunity cost and comparative advantage analysis from
economics, and contribution margin from accounting?)

Q. 2. Using the client's production cost data (Exhibit 1),
demonstrate the change in profits expected from the above
production recommendation for the alternative potential selling
prices of GM yellow corn.

Q. 3. Assuming the probabilities of alternative prices for GM
yellow corn are as stated in Exhibit 5, calculate the expected
change in profits from adopting our recommendation. (This is
important since it can be used to justify our consulting fees.)

Q. 4. Okay, that's the economic analysis, but consider the nature
of a family business and any strategic and ethical issues that
might be important, and check with me. We want to make the right
recommendation for the client.

Exhibit 5: Marketing and Price Analysis

Benderson Consulting 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.

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

2. 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.

Richard Tontz, California State University, Northridge

Leonard Rymsza, California State University, Northridge

Leah Marcal, California State University, Northridge

Exhibit 2: Estimated Production by Farm

Projected Year 20xx: Production Summary for AA Yellow Corn by
Sub-division:

1. Brookhurst Farm:        200 acres    20,000 bushels   (100 per acre)
2. Fordum Estates:         500 acres    50,000 bushels   (100 per acre)
3. Gatos Peligo:           300 acres    60,000 bushels   (200 per acre)
4. Sally's Place:          800 acres    160,000 bushels  (200 per acre)
5. Belgrove Farms Total:   1,800 acres  290,000 bushels
                                        AA yellow corn

Projected Year 20xx: Production Summary for GM Yellow Corn by
Sub-division:

1. Brookhurst Farm:        200 acres    22,000 bushels   (110 per acre)
2. Fordum Estates:         500 acres    50,500 bushels   (101 per acre)
3. Gatos Peligo:           300 acres    90,000 bushels   (300 per acre)
4. Sally's Place:          800 acres    320,000 bushels  (400 per acre)
5. Belgrove Farms Total:   1,800 acres  482,500 bushels
                                        GM yellow corn

Exhibit 3: Belgrove Farms: Income for the Two Years Preceding 20xx

                                1st Prior Year      2nd Prior Year
                                  (Last Year)    (Year Before Last)

Sales and Changes in Value of      $1,254,250           $1,160,181
  Crop Inventories
Expenses and Losses
Cost of Production                    720,360              677,138
Selling, General, and                 313,200              269,352
  Administrative Expenses
Technological Expenses                 93,960               79,866
Other                                  11,745               10,336
Income From Continuing                114,985              123,489
  Operations Before Taxes
Income Taxes                           32,196               34,577
Net Income                            $82,789              $88,912
Basic Earnings Per Share                $0.32                $0.35