Case Scenario:
Agribiz Food Products, Inc., produces a wide variety of food and related products. The company's tomato canning operation relies partly on tomatoes grown on Agribiz's own farms and partly on tomatoes bought from other growers.
Agribiz's tomato farm is on the edge of Sharpestown, a fast-growing, medium sized city. It produces 8 million pounds of tomatoes a year and employs 55 persons. The annual costs of tomatoes grown on this farm are
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Variable production costs
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$550,000
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Fixed production costs
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$1,200,000
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Shipping costs (all variable)
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$200,000
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Total costs
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$1,950,000
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Fixed production costs include depreciation on machinery and equipment, but not on land because should not be depreciated. Agribiz owns the land, which was purchased for $600,000 many years ago. A recent appraisal placed the value of the land at $15 million because it is a prime site for an industrial park and shopping center.
Agribiz could purchase all the tomatoes in needs on the market for $.25 per pound delivered to it factory. If id did this, it would sell the farmland and shut down the operation in Sharpestown. If the farm were sold, $300,000 of the annual fixed costs would be saved. Agribiz can invest excess cash and earn an annual rate of 10%.
- How much does it cost Agribiz annually for the land used by the tomato farm?
- How much would Agribiz save annually if it closed the tomato farm? Is this more or less than would be purchase the tomatoes on the market?
- What ethical issues are involved with the decision to shut down the tomato farm?