In the memorandum below, Karen Lee, your team leader, has provided an outline of what you should consider and include in the preliminary analysis. Please incorporate the answers to the questions below in your report.
Memo

To: Junior Analysts, Mercer Farms

From: Karen Lee, Senior Financial Analyst, Mercer Farms
MPK
Date: February 2, 2009

Re: Mercer Farms Inc.

Please forgive my generality, but since I don’t know at the moment who will be doing this research, I have laid out a brief outline of the major points I think should be considered in evaluating the proposal of Mr. Michael Bell, the Operations Manager of Mercer Farms, Inc.

Background: Allen Mercer, a conservative older gentleman who founded the firm, is the client. He is very proud of the firm’s commitment to quality. Michael Bell, a nephew of Mr. Mercer, was hired by him two years ago. Michael is 27 and recently graduated from a state university with a business degree.

Q. 1. Mercer Farms has four sub-divisions (four different farms it has previously acquired). Since the farms have different relative productive abilities (AA yellow corn vs. GM yellow corn), and production can be shifted by farm, consideration must be given to the best combination of outputs to maximize the economic profit.

a. Calculate the output of each farm for AA yellow corn or GM yellow corn. From this data, calculate the economic cost of AA yellow corn in terms of GM yellow corn (ratio) and the economic cost of GM yellow corn in terms of AA yellow corn (ratio) [i.e., 1 AA = ? GM; or 1GM = ? AA.]

b. Our marketing division has put together a projection of selling prices (see Exhibit 4). Apparently, there are some consumer issues about the new corn. These issues may affect the selling price of GM yellow corn. Evaluation of some alternative prices for GM yellow corn may be in order.

c. Combine the relative output ratios from Q.1.a. with the selling prices from Q.1.b. to determine an optimal output table at each selling price of GM yellow corn. (Remember opportunity cost and comparative advantage analysis from economics, and contribution margin from accounting?)

Q. 2. Using the client’s production cost data (Exhibit 1), demonstrate the change in profits resulting from the above production recommendation for the alternative potential selling prices of GM yellow corn.

Q.3. Okay, that’s the economic analysis, but consider the nature of a family business and any strategic and ethical issues that might be important, and check with me. We want to make the right recommendation for the client.