國立交通大學運輸科技與管理學系

作業研究(I)

Red Brand Canners

(Modified from Red Brand Case: Stanford University, 1965.)

On Monday, September 12, 2005, Mr. Michael Gordon, Vice President of operations,
asked the Controller William Cooper, the Sales Manager Charles Myers, and Dan Tucker the
Production Manager to meet with him to discuss the amount of tomato products to pack that
season. The tomato crop, which had been purchased at planting, was beginning to arrive at the
cannery, and packing operations would have to be started by the following Monday. Red Brand
Canners (RBC) was a medium-size company that canned and distributed a variety of fruit and
vegetable products under private brands in the western states.

Cooper and Myers were the first to arrive in Mr. Gordon’s office. The production
manager came in a few minutes later and said that he had picked up produce inspection’s latest
estimate of the quality of the incoming tomatoes. According to their report, about 20% of the
crop was grade “A” quality and the remaining portion of the 3 million pound crop was grade
“B”.

Gordon asked Myers about the demand for tomato products for the coming year. Myers
replied that they could sell all of the whole canned tomatoes they could produce. The expected
demand for tomato juice and tomato paste, on the other hand, was limited. The sales manager
then passed around the latest demand forecasts, which is shown in Exhibit 1. He reminded the
group that the selling price has been set in light of the long-term marketing strategy of the
company, and potential sales have been forecasted at these prices.

EXHIBIT 1
Demand Forecasts
SELLING PRICE DEMAND FORCAST
PRODUCT
PER CASE (CASES)
1
24 − 2 Whole
2 $4.00 800,000
Tomatoes
1
24 − 2 Tomato Juice 4.50 50,000
2
1
24 − 2 Tomato Paste 3.80 80,000
2

Bill Cooper, after looking at Myers’ estimates of demand said that it looked like the
company “should do quite well on the tomato crop this year.” With the new accounting system
that had been set up, he has been able to compute the contribution for each products, and
according to his analysis the incremental profit on the whole tomatoes was greater than for any
other tomato products. In May, after RBC had signed contracts agreeing to purchase the grower’s
production at an average delivered price of 6 cents per pound, Cooper had computed the tomato
products’ contributions (see Exhibit 2).

1
國立交通大學運輸科技與管理學系
作業研究(I)

Dan Tucker brought to Cooper’s attention that although there was ample production
capacity, it was impossible to produce all whole tomatoes because too small portion of the
tomato crop was “A” quality. RBC used a numerical scaling to record the quality of both raw
produce and prepared products. This scale ran from 0 to 10, with the higher number representing
better quality. Rating tomatoes according to this scale, grade “A” tomatoes averaged 9 points per
pound and grade B tomatoes averaged 5 points per pound. Tucker noted that the minimum
average input quality for canned whole tomatoes was 8 and for juice it was 6 points per pound.
Paste could be made entirely from grade “B” tomatoes. This meant that whole tomato production
was limited to 800,000 pounds.

Gordon stated that this was not a real limitation. He had been recently solicited to
purchase 80,000 pounds of grade “A” tomatoes at 8.5 cents per pound and at that time he turned
down the offer. He felt, however, that the tomatoes were still available.

EXHIBIT 2
Product Item Profitability
PRODUCT
1 1 1
24 − 2 24 − 2 24 − 2
2 2 2
COSTS WHOLE TOMATOES TOMATO JUICE TOMATO PASTE
Selling Price (per case) $4.00 $4.50 $3.80
Variable Costs
Direct Labor 1.18 1.32 0.54
Variable Overhead 0.24 0.36 0.26
Variable Selling 0.40 0.85 0.38
Packaging Material 0.70 0.65 0.77
Fruit* (cost per case) 1.08 1.20 1.50
Total Variable Cost 3.60 4.38 3.45
Net Profit (per case) 0.40 0.12 0.35
*Product usage is as given bellow.
POUNDS
PRODUCT PER CASE
Whole Tomatoes 18
Tomato Juice 20
Tomato Paste 25

2
 國立交通大學運輸科技與管理學系
作業研究(I)

EXHIBIT 3
Marginal Analysis of Tomato Products
Z = cost per pound of “A” tomatoes in cents
Y = cost per pound of “B” tomatoes in cents
(1) (600,000 lb x Z) + (2,400,000 lb x Y) = (3,000,000 lb x 6)
Z Y
(2) =
9 5
Z = 9.32 cents per pound
Y = 5.18 cents per pound
CANNED TOMATO TOMATO
PRODUCT
WHOLE TOMATOES JUICE PASTE
Selling Price $4.00 $4.50 $3.80
Variable Cost
(excluding Tomato Cost) 2.52 3.18 1.95
$1.48 $1.32 $1.85
Tomato Cost 1.49 1.24 1.30
Marginal Profit ($ 0.01 ) $0.08 $0.55

Myers, who had been doing some calculations, said that although he agreed that the
company “should do quite well this year” it would not be by canning whole tomatoes. It seemed
to him that the tomato cost should be allocated based on quantity and quality, rather than by
quantity only as Cooper had done. Therefore, he re-computed the marginal profit on this basis
(see Exhibit 3). From his result, RBC should use 2,000,000 pounds of the grade “B” tomatoes for
paste, and the remaining 400,000 pounds of grade “B” along with all of the 600,000 pounds of
grade “A” tomatoes for juice. If the demand expectations were realized, a contribution of
$48,000 would be made on this year’s tomato crop.

Questions: PART A

1. Why does Tucker state that the whole tomato production is limited to 800,000 pounds?
(i.e., where does the number 800,000 come from?)

2. What is wrong with Cooper’s suggestion to use the entire crop for whole tomatoes?

3. How does Myers reach the conclusion that the company should use 2,000,000 pounds of grade
‘B’ tomatoes for paste and the rest of the grade “B” and all of grade “A” tomatoes to produce
juice? What is wrong with Myers reasoning?

4. Without including the possibility of the additional purchases suggested by Gordon,

formulate as an LP the problem of determining the optimal canning policy for this season’s crop.
Define your decision variables in terms of pounds of tomatoes. Express the objective function
coefficients in cents per pound.

5. How should your model be modified to include the possibility of the additional purchases
suggested by Gordon?

3
 國立交通大學運輸科技與管理學系
作業研究(I)

Alternative Questions:

Suppose Produce Inspection could use three grades to estimate the quality of the tomato
crop. Grade “A” tomatoes average nine points per pound, “B” tomatoes average six points per
pound, and “C” tomatoes average three points per pound. Using this system their report would
indicate that 600,000 pounds are grade “A” quality, 1,600,000 pounds are grade “B”, and the
remaining 800,000 pounds are grade “C”. Paste has no minimum average quality requirement.

6. What is the maximum production in pounds of canned whole tomatoes? Can Cooper’s
suggestion be implemented?
Myers extends his analysis to three grades in Exhibits 4.

Based on Exhibit 4, Myers recommends using all grade “C” tomatoes and 1,200,000
pounds of grade “B” tomatoes for paste, and all grade “A” tomatoes and all remaining grades “B”
tomatoes for juice.

7. How does Myers compute his tomato costs in Exhibit 4? How does he reach his
conclusion to use 800,000 pounds of grade “C” and 1,200,000 pounds of grade “B” for paste,
and the rest of the tomatoes for juice? What is wrong with Myers reasoning?

8. Without including the possibility of the additional purchase suggested by Gordon,

formulate as an LP the problem of determining the optimal canning policy for this season’s crop.
Define your decision variables in terms of pounds of tomatoes. Express the objective function in
cents.

9. How should your model be modified to include the possibility of the additional purchases
suggested by Gordon?

EXHIBIT 4
Myers’s Marginal Analysis
X = cost per pound of “C” tomatoes in cents
(1) (600,000 lb x z) + (1,600,000 lb x Y) + (800,000 lb x X) = (3,000,000 lb x 6)
Z Y
(2) =
9 6
Y C
(3) =
6 3
Z = 9.32 cents per pound
Y = 6.21 cents per pound
X = 3.10 cents per pound
CANNED TOMATO TOMATO
PRODUCT
WHOLE TOMATOES JUICE PASTE
Selling Price $4.00 $4.50 $3.80
Variable Cost
(excluding Tomato Cost) 2.52 3.18 1.95
$1.48 $1.32 $1.85
Tomato Cost 1.49 1.24 0.78
Marginal Profit ($ 0.01 ) $0.08 $1.07

4
 國立交通大學運輸科技與管理學系
作業研究(I)

Red Brand Canners

(Modified from Red Brand Case: Stanford University, 1965.)

Questions: PART B

In the following questions, the analysis of the Red Brand Canners case continues. Assuming only
two grades of tomatoes, you are asked to solve several formulations on the computer and then
analyze the outputs.

1. Run on your own computer your LP formulation of the Red Brand Canners production
problem. Do not include the option of purchasing up to 80,000 additional pounds of grade “A”
tomatoes.

2. What is the net profit obtained after netting out the cost of the crop?

3. Myers has proposed that the net profit obtained from his policy would be $48,000. Is this true?
If not, what is his net profit (taking into account, as in question 2, the cost of the crop).

4. Suppose Cooper suggests that, in keeping with his accounting scheme as advanced in Exhibit 2,
the crop cost of 6 cents per pound should be subtracted from each coefficient in the objective
function. Change your formulation accordingly, and again solve the problem. You should obtain
an optimal objective value which is greater than that obtained in question 2. Explain this
apparent discrepancy (assume that unused tomatoes will spoil).

5. Suppose that unused tomatoes could be resold at 6 cents per pound. Which solution would be
preferred under these conditions? How much can the resale price be lowered without affecting
this preference?

6. Use the sensitivity output from question 1 to determine whether the additional purchase of up to
80,000 pounds of grade “A” tomatoes should be undertaken. Can you tell how much should be
purchased?

7. Use a reformulated model to obtain an optimal product mix using the additional purchase
option. The solution to your reformulated model should explicitly show how the additional
purchase should be used.

8. Suppose that in question 1 the Market Research Department feels it could increase the demand
for juice by 25,000 cases by means of an advertising campaign. How much should Red Brand be
willing to pay for such a campaign?

9. Suppose in question 1 that the price of juice increased 10 cents per case. Does your computer
output tell you whether the optimal production plan will change?

10. Suppose that RBC is forced to reduce the size of the product line in tomato-based products to 2.
Would additional computer runs be required to tell which product should be dropped from the
line?

5
 國立交通大學運輸科技與管理學系
作業研究(I)

11. Suppose that in question 1 an additional lot of grade “B” tomatoes is available. The lot is
50,000 pounds. How much should RBC be willing to pay for this lot of grade “B” tomatoes?

For the following questions assume 3 grades of tomatoes, as in the alternate question in Part A.

12. Run on your own computer your LP formulation of Question 8 of the Alternate Questions for
Red Brand Canners.

13. What is the net profit obtained after netting out the cost of the crop?

14. Myers claims the net profit from his policy of producing 2,000,000 lb paste and 1,000,000 lb
juice is $89,600. Is this correct? If not, what is his net profit (taking into account, as in question
13, the cost of the crop)?

15. Suppose Cooper suggests that, in keeping with his accounting scheme as advanced in Exhibit 2
the crop cost per pound should be subtracted from each coefficient in the objective function.
Change your formulation accordingly, and again solve the problem, assuming a crop cost of 7
cents per pound. You should obtain a solution that is different from that obtained in question 12.
Which solution has a higher net profit (assume unused tomatoes will spoil)? Is it correct to
include tomato costs in the objective function?

16. If in question 15 unused tomatoes could be resold for 7 cents a pound, which solution would be
preferred? How much can the resale price be lowered without affecting this preference?

17. Use the sensitivity output from question 12 to determine whether the additional purchase of up
to 80,000 pounds of grade “A” tomatoes should be undertaken. Can you tell how much should be
purchased?

18. Use a reformulated model to obtain an optimal product mix using the additional purchase
option. The solution to your reformulated model should explicitly show how the additional
purchase should be used.

19. Suppose that in question 12 the Market Research Department feels they could increase the
demand for paste by 3,000 cases by means of an advertising campaign. How much should Red
Brand be willing to pay for such a campaign?

20. Suppose in question 12 that the price of canned whole tomatoes decreased by 16 cents per case.
Does your computer output tell you whether the optimal production plan will change?

21. Suppose that the Market Research Department suggests that if the average quality of paste is
below 4 the product will not be acceptable to customers. Would an additional computer run be
necessary to determine the optimal production plan if this constraint were added to the model?

22. Suppose that in question 12 an additional lot of grade “C” tomatoes is available. The lot is
200,000 lb. How much would RBC be willing to pay for this lot of grade “C” tomatoes?