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Competency

Interpret financial decision-making criteria.

Student Success Criteria

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Scenario

You are an operations manager for New Foods Company. The company manufactures organic versions of common food items, such as cookies and bread. New Foods has built a reputation for good taste and quality in its products and has developed partnerships with several health food retailers. An opportunity exists to expand into a traditional grocery store chain with a new partnership. This opportunity will require increased production. However, your firm has not previously sold its products in this channel and uncertainty exists about the volume of new product sales that may result.

The executive leadership team of New Foods Company wants to grow the firm and it has been working with the local government on potential tax credits for creating new jobs in the area. The leadership team has also identified a commercial bank that will provide loans for any plant and equipment purchases. An overarching goal of the leadership team is to maintain product quality and the brand’s reputation.

Three options for increasing production have been identified.

• The first option is to purchase and refurbish a manufacturing plant location in a nearby town that has been closed for several years. Equipment to operate this plant would also have to be acquired. The location is large enough to build production for the expected volume and have excess space to accommodate growth of 200% in the future. This refurbished location could be operational in 12 months.
• The second option is to lease capacity from another food manufacturing firm that does not make its own branded products but operates as a co-manufacturer for others. This firm currently has enough available capacity for the expected volume, but not to increase above that level. This production process could be operational in 3 months.
• The third option is to expand your existing plant location by purchasing adjacent land and constructing a new building. Equipment to operate this expansion would also have to be acquired. The land is large enough to build production for the expected volume and have excess space to accommodate growth of 50% in the future. This new location could be operational in 18 months.