Case 2 – Solutions

Southern Turkey

Southern Turkey's production division operates 10 turkey-producing facilities in Tennessee, Arkansas, and Kentucky. The firm's marketing division sells frozen turkey and turkey products in the southeastern United States. It has been in business since 1955 and currently has an 80 percent market share in the region. There are numerous other sellers, but they have little impact on Southern Turkey's operations. Quarterly sales data for the company (in thousands of pounds) for four years are shown in the following table.

A concern for managers at Southern Turkey is that they lack information about the factors that affect demand for their product. In the past, some sales forecasts have been inaccurate because of fluctuations in the prices of substitute goods or changes in general economic conditions. To obtain needed data, management approved a marketing experiment in 100 cities in the firm's market area. This experiment was conducted during the first six months of 1997 and involved charging different prices for turkey and then measuring the per capita consumption in each city. In addition, data were collected on income per capita and prices of chicken, beef, and pork for each of the 100 cities. Then multiple-regression techniques were used to estimate the following per capita demand function for turkey:

\(Q=7.00-10.0 P_{T}+2.0 P_{C}+1.0 P_{B}+0.50 P_{P}+.0003 I\)

(4.29) \((-5.642)(3.333)(2.876) \quad(0.503) \quad(2.000)\)

\(R^{2}=0.75\)

where the \(t\) -statistics are in parentheses and

At the present time, the average wholesale selling price of Southern's turkey is $0.50 per pound. In the southeastern United States, the average prices of chicken, beef, and pork are $0.50, $1.50, and $1.50 per pound, respectively. Income per capita in that region is $18,000.

Requirements

1. How much turkey will the firm sell in 1999 and in 2000 ? How much will be sold in the fourth quarter of each of those years? (Recall that the fourth quarter includes the Thanksgiving and Christmas holidays.) Describe and justify your choice of a forecasting technique. Identify possible sources of error in your forecast.
2. At this time, the firm's production facilities are capable of producing 17,500,000 pounds of turkey every three months. However, management has tentative plans to expand capacity by constructing two new production facilities. These additions will be started in mid-2000 and be operational by June 2001. The expansion will increase the firm's production capacity to 19,000,000 pounds per quarter. Should
   management proceed with its timetable for expanding capacity? Why or why not?
3. Historically, prices have been determined by using a markup over production cost. Is there reason to believe that the current price of $0.50 per pound is not the profit maximizing price? Explain.
4. In the data provided, does management have any information that would suggest how the demand for turkey is affected by general economic conditions? Explain. Be specific.
5. Government forecasts predict beef and chicken prices will be 10 percent higher in 1999 , while pork prices will decline by 20 percent. The price of turkey is expected to be unchanged. Estimate the individual impacts of each of these changes on the per capita demand for turkey. How confident are you about your estimates? How would this change your forecasts of sales made in part 1? Explain.

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