Starbucks purchases and roasts high-quality, whole-bean coffees, its hallmark, and sells them along with other coffee-related products primarily through its company-operated retail stores. Suppose that the quality-control manager at Starbucks discovered a 1,200-pound batch of roasted beans that did not meet the company’s quality standards. Company policy would not allow such beans to be sold with the Starbucks name on them. However, they could be reprocessed, at which time they could be sold by Starbucks’ retail stores, or they could be sold as is on the wholesale coffee bean market.
Assume that the beans were initially purchased for $800, and the total cost of roasting the batch was $2,520, including $420 of variable costs and $2,100 of fixed costs (primarily depreciation on the equipment).
The wholesale price at which Starbucks could sell the beans was $3.80 per pound. Purchasers would pay the shipping costs from the Starbucks plant to their individual warehouses. If the beans were reprocessed, the processing cost would be $900 because the beans would not require as much processing as new beans. All $900 would be additional costs, that is, costs that would not be incurred without the reprocessing. The beans would be sold to the retail stores for $4.90 per pound, and Starbucks would have to pay an average of $.45 per pound to ship the beans to the stores.
1. Should Starbucks sell the beans on the market as is for $3.80 per pound, or should the company reprocess the beans and sell them through its own retail stores? Why?
2. Compute the amount of extra profit Starbucks earns from the alternative you selected in number 1 compared to what it would earn from the other alternative.
3. What cost numbers in the problem were irrelevant to your analysis? Explain why they were irrelevant.