Mike has a big decision to make. He had inherited his family’s business. The family had around 10,000 acres in cultivation, and lettuce makes 25% of the total crop value. They grew, harvested, packaged and sold produce. Mike was concerned because a large storm was approaching, and he must make decisions regarding his lettuce crop. Mike's concern that the storm might bring strong winds and dust. High winds can tear apart the lettuce and dust render the crop unsalvageable. From his father's records he had read that if he applied water combined with standard wax, a residue would form on the lettuce and the crop could be saved. He knew that if the storm did come, he would lose the entire crop if it was not protected. However, he didn't know how much the solution would cost him or how much he should pay. Mike knew that the storm had 50/50 chance of hitting. Mike knew that if the storm didn't hit and he did protect his crops, the residue left might cause problems during harvest. After conversing with his Co-op Extension officer, he had surmised that the probability of the residue causing problem is around 30%. If this problem did occur, Mike would get 80% of his normal crop. Mike usually sold his lettuce with a margin of $0.15 per pound. Normally the crop would be around 800,000 lbs. If he didn't protect his crop and the storm did hit, he probably could salvage 10% of the lettuce. However, if he did protect and the storm did hit, there was no guarantee that 100% of the crop would be saved. In fact, from the information the Co-op Extension officer had provided, there was around 60% chance that he would lose part of his crop even if he did take protective measures and the storm hit. He surmised that three scenarios could occur in this case: a 90% salvage rate, a 75% salvage rate and 50% salvage rate. Mike thought these three scenarios have equal probabilities. Mike knew that if he had harvested right now, he could make $0.05 margin per pound on the total crop of lettuce. Overall operating costs were about the same in any situation. Mike needs to know if he should protect his crop and some guidance on what he should pay. Help Mike with his dilemma. Discussion Questions: 1. What is Mike’s expected gross revenue if he harvests now? 2. What is his gross revenue if he does nothing and waits out the storm? 3. What are the risks in choosing to harvest now or in waiting out the storm? 4. Is it a good idea for Mike to protect his crop? Why? 5. What is the maximum that Mike should pay for the protection? 6. What other decisions can Mike make? ( for this question, you can make further assumptions beyond the information given in the case. Make sure you explain / back-up your assumptions). * Could you go in detail for questions 1 and 2 corresponding to the tree analysis
Mike has a big decision to make. He had inherited his family’s business. The family had around 10,000
acres in cultivation, and lettuce makes 25% of the total crop value. They grew, harvested, packaged and
sold produce. Mike was concerned because a large storm was approaching, and he must make decisions
regarding his lettuce crop. Mike's concern that the storm might bring strong winds and dust. High winds
can tear apart the lettuce and dust render the crop unsalvageable.
From his father's records he had read that if he applied water combined with standard wax, a residue
would form on the lettuce and the crop could be saved. He knew that if the storm did come, he would
lose the entire crop if it was not protected. However, he didn't know how much the solution would cost
him or how much he should pay. Mike knew that the storm had 50/50 chance of hitting. Mike knew that
if the storm didn't hit and he did protect his crops, the residue left might cause problems during harvest.
After conversing with his Co-op Extension officer, he had surmised that the probability of the residue
causing problem is around 30%. If this problem did occur, Mike would get 80% of his normal crop.
Mike usually sold his lettuce with a margin of $0.15 per pound. Normally the crop would be around
800,000 lbs. If he didn't protect his crop and the storm did hit, he probably could salvage 10% of the
lettuce. However, if he did protect and the storm did hit, there was no guarantee that 100% of the crop
would be saved. In fact, from the information the Co-op Extension officer had provided, there was
around 60% chance that he would lose part of his crop even if he did take protective measures and the
storm hit. He surmised that three scenarios could occur in this case: a 90% salvage rate, a 75% salvage
rate and 50% salvage rate. Mike thought these three scenarios have equal probabilities.
Mike knew that if he had harvested right now, he could make $0.05 margin per pound on the total crop
of lettuce. Overall operating costs were about the same in any situation.
Mike needs to know if he should protect his crop and some guidance on what he should pay. Help Mike
with his dilemma.
Discussion Questions:
1. What is Mike’s expected gross revenue if he harvests now?
2. What is his gross revenue if he does nothing and waits out the storm?
3. What are the risks in choosing to harvest now or in waiting out the storm?
4. Is it a good idea for Mike to protect his crop? Why?
5. What is the maximum that Mike should pay for the protection?
6. What other decisions can Mike make? ( for this question, you can make further assumptions beyond
the information given in the case. Make sure you explain / back-up your assumptions).
* Could you go in detail for questions 1 and 2 corresponding to the tree analysis.
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