1. Mercer Farms Case Student Coaching Notes

2. Top Ten LDC Concepts in Case
Micro: #1: Opportunity cost
Micro: #2: Comparative advantage
Micro: #4: How prices affect resource allocation.
Management Accounting: #8. How to use cost data in decision-making. What is relevant?
Statistics: # 5. The concept of expected value and how to calculate it

3. Case Facts – Key Players
Mercer Farms – Client
Allen Mercer – CEO
Michael Bell – Operations Manager
Karen Lee Team Leader
You have been hired by Karen’s team

4. Case Facts – Overview
Mercer Farms owns four different fields and grows AA Corn
Michael Bell wants Mercer Farms to switch to GM Corn
His profit analysis is contained in Exhibit 1
Is based on a price of $3.25 for GM corn
Assumes entire acreage is devoted to either AA or GM corn
Ignores price uncertainty of GM corn
Productivity differs across farms (See Exhibit 2)
Mercer’s income statements are available (See Exhibit 3)
Forecasted price for GM corn (See Exhibit 4)

5. Case Facts: Price Data AA Corn is expected to sell for $ 5.00/bushel
GM Corn has two possible prices.
GM Corn: $ 5.50/bushel
GM Corn: $ 4.70/bushel

6. What type of corn to plant in which field?
Case Facts – Key Issue
What type of corn to plant in which field?
How to deal with the uncertainty around GM corn’s prices?
What is differential profit from the recommended growing strategy?

7. When Does Mercer Know Prices?
Assumption: Prices revealed before planting decision
Today
Analysis being done
Actual Outcome
Prices of GM corn known
Action Date
Planting decision made

8. Mercer Farms is a Price Taker Firm (Most Competitive Market)
Mercer Farms is one of thousands of firms producing the same product.
As such, they have no market power to set price, but take the price from the market.
The market price is determined by the interaction of all the buyers (demand) and sellers (supply) of yellow corn.

9. Economic & Accounting Concepts of Profit
Business firms attempt to maximize economic profit. ()
 = Total Revenue – Total Economic Cost
Total Revenue = Price x Quantity
Total Economic Cost = the Opportunity Cost of the resources used in production
Accounting Profit = Total Revenue – Total Variable and Fixed Costs
Incurred Cost is the actual amounts paid or obligations entered into for future payments

10. Comparative Advantage
A resource (farm) has a comparative advantage in the production of a good (GM corn) if it has the lowest opportunity cost of production
The four farms have differing relative abilities to produce AA or GM corn
The production decision should compare each farm’s gain (contribution margin) with the opportunity cost of production

11. Opportunity Cost of Production
The opportunity cost of any output is the value of the best alternative given up
The economic (opportunity) cost of producing GM corn depends on the amount of AA corn given up and the contribution margin from producing AA corn

12. Cost Classifications
Variable costs -- those that change with change in activity levels (e.g., units produced, service provided) in an organization
Fixed costs -- those that do not vary with the activity level
Incremental costs - the change in costs associated with changing the output above some base level or selecting one course of action over another
Relevant costs - those costs that differ across alternative courses of action
Opportunity costs - the benefit foregone by not using a limited resource in its best alternative use