Choosing a tomato channel in Burmarrad
Anna runs a 0.7 ha unheated greenhouse in Burmarrad, producing 55,000 kg of tomatoes a year. Variable costs are €0.52/kg and fixed costs €28,000/year. The Pitkalija wholesale market averages €0.85/kg but charges 9% commission and €0.04/kg transport. A supermarket offers €0.92/kg for Class I fruit, but grading rejects 12% as Class II, which can only be sold at Pitkalija; the contract also requires packaging at €0.06/kg and delivery at €0.03/kg, with payment in 48 hours. A local box scheme wants 90 boxes of 6 kg every fortnight (26 deliveries a year) at €14/box; each box costs €0.55 in packing and €0.40 to deliver, and about 5% of boxed fruit is unsaleable. The box scheme would need 0.1 hour of labour per box at €12/hour.
1. Calculate the net revenue per kg delivered through each of the three channels after the stated channel-specific costs. Which channel gives the highest net revenue per kg, and which gives the highest total contribution?
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Wholesale: €0.85 − (9% × €0.85) − €0.04 = €0.85 − €0.0765 − €0.04 = €0.7335/kg.
Supermarket: Class I = 88% × (€0.92 − €0.06 − €0.03) = 0.88 × €0.83 = €0.7304; Class II = 12% × €0.7335 = €0.0880; weighted net = €0.8184/kg.
Box scheme: revenue €14/6 = €2.333/kg. Costs per box = €0.55 packing + €0.40 delivery + (0.1 h × €12 = €1.20) = €2.15; per kg = €0.358. Net = €2.333 − €0.358 = €1.975/kg, but only 14,040 kg/year can be sold this way (90 × 6 × 26).
Contribution over variable cost: wholesale €0.2135/kg; supermarket €0.2984/kg; box €1.455/kg. The box scheme has the highest unit return; the supermarket has the highest unit return among the bulk channels. Total contribution depends on volume: box ≈ €20,428; all supermarket ≈ €16,412; all wholesale ≈ €11,743.
2. Recommend a channel mix for the 55,000 kg crop and justify it with numbers, considering risk, cash flow and labour. Also state what you would do with the Class II fruit.
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Recommended mix: send 14,040 kg to the box scheme, then send as much of the remaining 40,960 kg as possible to the supermarket, with Class II fruit going to Pitkalija.
Contribution calculation: box = 14,040 × €1.455 = €20,428. Supermarket: 40,960 × 88% = 36,045 kg Class I × €0.31 = €11,174; 4,915 kg Class II × €0.2135 = €1,049. Total contribution = €32,651. Less fixed costs €28,000 = €4,651 profit.
The all-wholesale plan makes a loss of about €16,257; the all-supermarket plan makes a loss of about €11,587. The mix is the only plan that covers fixed costs.
Beyond the arithmetic: the box scheme is limited and labour-intensive, so it cannot absorb the whole crop; the supermarket gives 48-hour payment, which helps cash flow; the box scheme may need prepayment or weekly billing to avoid a cash gap. Keep the wholesale relationship as a fallback and for Class II. Check that the supermarket's grading standard is realistic; the 12% rejection rate is a key risk.
3. The supermarket renegotiates to €0.88/kg, 15% Class II and 60-day payment. Recalculate the net revenue per kg and advise whether Anna should accept.
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New weighted net: Class I = 85% × (€0.88 − €0.06 − €0.03) = 0.85 × €0.79 = €0.6715; Class II = 15% × €0.7335 = €0.1100; total €0.7815/kg. Contribution over variable cost = €0.2615/kg. On 40,960 kg that is €10,711, about €1,512 less than the previous supermarket terms.
The 60-day payment also creates a cash-flow gap: at 40,960 kg × €0.52 variable cost ≈ €21,299, Anna would effectively finance two months of costs. Accept only if the volume is guaranteed, the price is indexed, and a 30-day payment or overdraft facility is agreed; otherwise keep the box scheme and wholesale mix.