Cost_and_Revenue_Curves

The Cost and revenue Curve simulation suggest that John maximizes Farm Fresh Orange Juice Company’s profit by using the knowledge he has acquired over the years about cost, revenues, and their interrelationship. After being appointed Chief Operating Officers (COO) John’s operating team considered moving production to one of following states California, Texas, or Florida. Before, he made a selection he and his team weighed there opportunity cost by comparing and contrasting the citrus industry in the three states. Marginal and average cost curve are very similar in California, Texas and Florida, but in other southern subtropical states costs is lower. Initially, the COO thought that the optimal production site for Farm Fresh was in California, he believed that the state was primed for citrus production. However, when he and his team began researching the area, there were some-things that concerned them. Producing delicious tasting orange juice and distributing it to the masses is how F.F.O.J. makes it money, and California has some issues that may hinder production. The current state of the citrus industry, weather, and commerce, played a valuable part in the COO decision. California is nationally known for possessing a good citrus industry that produces over 1.6 billion dollars a year. San Diego leads the state in orange juice production, and houses the largest concentration of organic farmers in the state. However, their citrus industry is being affected by the Asian citrus psyllid (ACP), which has ravaged orchards in Southern California. ACP is a pest that acts as a carrier or vector spreading "huanglongbing" (HLB), a devastating disease of citrus trees. This bacterial disease is transmitted to healthy trees by the psyllid after it feeds on infected plant tissue (CDFA, 2010). This particular pest, which comes from neighboring Tijuana, Mexico, is a hazard to all California citrus growers. Weather also played a major factor in the COO’s decision. Although he believes that the optimum state may be California. Research showed most citrus companies in the state must divest there interests into other states, and regions to ensure that they are not utterly affected by a pessimistic growing seasons. Successful companies in the state do a great job of balancing past and future weather patterns, enabling them to make provisions without effecting production. While balancing weather and a troubled industry the COO also noticed that California taxes are very high, and commerce in the state was greatly affected by the recession. Conversely, Texas and Florida are major business states that provide an abundance of tax cuts to companies aiding commerce in their states. John and his staff understood the importance of the above factors for they are key in deciding how and where they should do business. Commercial citrus production in Texas has been fairly good, but future production is in limbo. It recently has been limited to the Lower Rio Grand Valle. Production in Beeville, Beaumont, Carrizo Springs, Falfurrias, Houston, and Orange County have become wane because of the economy and reoccurring freezes. In addition the company worried about the possible spread ACP. Texas and Mexico are relatively close and the risk was far greater than what the company wished to chance. Knowing that citrus trees are subtropical to tropical in nature; the COO and his team decided to move production to Florida. Although the market is extremely competitive and has a low barrier of entry, Florida was the most attractive after weighing the opportunity cost. In January 2005, Farm Fresh Orange Juice maximized there profits when marginal cost (MC) equaled marginal revenue (MR) producing 100,000 tons of orange juice at an average cost (ATC) of 25.29 a ton averaging 4.71 a unit. However, the COO pushed his company to produce an additional 10,000 tons at an ATC of 26.19 a unit resulting in a profit of 3.81 a unit totaling 4.19. Despite the .9% hike in total cost from 100,000 to 110,000 the COO and his operating team where pleased with their projections. Shortly thereafter, they witnessed a drop in orange prices during the month of July. The drop in pricing impacted their decision by boosting their confidence, and instantly maximizing their profits. After pushing his team to produce an extra 10,000 tons the COO looks like an economic genius. The ATC of orange juice dropped to 22.39 a unit resulting in 7.61 profit totaling 8.37. The drop in pricing is projected to linger throughout the fiscal year. Farm Fresh should continue to see a substantial profit throughout the year. In an effort to repeat their latest success Farm Fresh Orange Juice produced another 10,000 tons totaling 120,000. The ATC was set 23.48, giving the company 6.51 per unit equally 782 in total profits. The drop in orange prices forced the company to have new cost structures, and they were fortunate to capitalize on them. In 2008 production began to take a turn for the worse. Heavy competition over the past few years from South American manufactures has brought down the market price of orange juice because these manufacturers enjoy a cost advantage due to there production outside of this country (Cost and Revenue Curves Simulation, 2010). 2008 proved to be the year that competition loomed high. The COO decided to place Fresh Farm Orange Juice in a short term shut down there marginal cost began exceeding there marginal revenue. The company recorded a total profit of negative 323. However, entities like Fresh Farm Orange Juice can shut down in the short term, until the market price is high enough to cover its average variable cost (AVC). In competitive markets like the citrus industry, the short term shut down could last a few months. Yet the firm the COO was persistent in shortening this time by examining all the factors that make up marginal costs. He and his team explored cost cutting, by temporarily cutting pay, reevaluating their maintenance schedules, and avidly discussing lower prices with farmers to minimize the cost of production per unit. The COO also discussed branding their product to gin customer value in an effort to increase price, and raise revenue to or above marginal costs. They also explored lowering the average cost per unit of production by seeking technological improvements. They even ponder about manufacturing and distributing other types of juices like apples, pineapples, grapes, and other fruits people enjoy. Nevertheless, Florida showed why the COO elected to do business in the state. They offered a tax cut that decreased manufacturing cost. The tax cut was deemed as good, but it was not enough to get the company rolling again. By the year of 2011 orange juice lost some of its popularity as other fruit juices like apples, pineapples, and grapes satisfied the masses. The anti dumping legislation forced South American competition out of the market due to disclosed violations, giving Farm Fresh Orange Juice an opportunity to reinvent there product. They immediately reopened production and produce a quantity of 100,000. Averaging 21.73 in total cost and 23.00 in total revenue the company maximized their profits at 127. In conclusion, the COO Fresh Farm Orange Juice went against the optimal choice of the simulation, and did an exceptional job. During the first half of 2005 Fresh farm produced more than the optimal choice, even though FFOJ maximized their profit they were outgained by 52 points. The second half of 2005 virtually mirrored the first half of 2005. In 2008 both shutdown production in the first half of the year, but the optimal choice continued production in the second half of the year and FFOJ did not. In 2011 both sides maximized profits by producing 100,000 tons of juice recording profits 127. To resolve future challenges Fresh Farm may face, they should continue production in the short – run. This perhaps may the best way to reduce labor cost, and keep a handle on other variable resources. Furthermore, they must seek alternative uses for their production equipment. Producing other fruit juices will expand their market and increase revenue. Fresh Farm Orange Juice should reanalyze their demand and supply curves; consider broader revenue concepts and consider various profit possibilities for their organization.