Halibut Pricing Problem While fishing for halibut in Kodiak, AK, we have the opportunity to obtain the
Question:
Halibut Pricing Problem While fishing for halibut in Kodiak, AK, we have the opportunity to obtain the heads from approximately 40,000 lbs. of halibut. We estimate that the heads will weigh approximately 6,400 lbs. or about 16% of the total weight. Our cost of these heads is 10 lbs. of processed halibut cheeks in | 1.0 lb. vacuum packs for the owner of the IFQs (Individual fishing quota-the owner purchases the right to fish x lbs. of halibut, purchased in 1 lb. increments). Initial processing occurs in Kodiak and final processing in Bellingham. For final processing assume the recovery rate is 5% (from head to cheeks).
All processing charges are based on finished weight at that particular part of the process.
It is planned that the bulk of this product be sold wholesale to a local restaurant. Current wholesale market prices are $18/1b. Retail pricing is $26/1b.
Selling expenses are 5% and are taken off the sales price.
From start to finish, assume product is completely sold within 6 months. What is the lowest price/lb. we can sell our halibut cheeks for while maintaining a minimum 15% profit margin. This is an added opportunity for the business and thus the overhead and expenses have already been covered by other fisheries.
We have 2 Options:
1. Freeze heads in Alaska and ship to Bellingham for final processing (yellow processing costs)
2. Process in Alaska and ship to Bellingham for packaging (green processing costs)
Calculate the costs of each option showing minimum price for each option giving a 15% profit margin. Make a recommendation on how to proceed.
Expert Answer:
