Johnson and Sons Inc. produces organic cranberry juice from cranberries it farmed. Unfortunately, it has been a bad year for cranberries because of severe cold weather. Johnson has only 10,000 litres of juice. It usually sells 15,000 litres at $3 per litre. The variable costs of farming the cranberries are $0.50 per litre. Johnson has loyal customers, but its managers are worried that the company will lose customers if it does not have juice available for sale when people stop by the farm. A neighbour is willing to sell 5,000 litres of extra cranberry juice at $2.95 per litre.
REQUIRED
A. Which type of non-routine operating decision is involved here? What are the managers’ decision options?
B. Using the general decision rule, what is the most per litre that Johnson’s managers would be willing to pay for additional juice?
C. Why would Johnson be willing to pay the amount calculated in Part B for more juice?
D. Is the quality of the neighbour’s juice a concern to Johnson’s managers in making this decision? Why or why not?
E. List another qualitative factor that might affect the managers’ decision.
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