MGMT 8415M Week 5 Trade-Off Memo Example

Memorandum

To: Chief Financial Officer, Sawyer Creek Foods

From: Doctoral student, MGMT 8415M

Date: March 2, 2026

Re: Recommended allocation of the cost of full payment for abandoned contract acres

Recommendation

I recommend funding full payment for contract acres the company abandons for its own business reasons by splitting the expected cost of about $340,000 a year between operating margin, about 60 percent, and a price adjustment on frozen vegetable contracts with retail and food service customers, about 40 percent. Growers' base contract prices should not be reduced to fund it.

The Obligation, Restated

In earlier analysis, the obligation was grounded in the company's control: Sawyer Creek sets planting dates, varieties and harvest timing, and growers cannot sell processing crops elsewhere at short notice. When the company abandons fields because frozen inventory is high, it creates a loss through decisions it controls. The obligation is to pay the contracted value for those acres. Based on the last five seasons, abandonment averaged about 3 percent of contracted acres, with a range from under 1 percent to 7 percent, so the cost runs from about $100,000 in a good year to nearly $800,000 in a bad one.

Three Ways to Split the Cost

[after]

Estimates use the five-year average abandonment rate and the 2025 contract volume. In a bad year, each option's figures would rise to more than twice these amounts.

Table 1

Expected Annual Cost Borne by Each Party Under Three Options

Arguing the Choice

Option C has the appeal of shared responsibility, but it largely undoes the obligation. Growers would pay for their own protection through a lower base price on every acre, and the growers least likely to have fields abandoned, those nearest the plants, would subsidize those most likely to. The duty arises from the company's decisions, so the company should bear its cost. Option A is clean but loads all variation onto margin, which in a bad year could press on the capital program. Option B spreads the cost to customers who benefit from Sawyer Creek's flexible supply, the reason abandonment occurs, and keeps the price effect small enough that customers are unlikely to notice it.

The Single-Objective Objection

Jensen (2002) argued that a firm told to serve several objectives at once gives its managers no way to make trade-offs and no standard against which to judge them, leaving them accountable to no one; firms should maximize long-run value, and stakeholder concerns matter as means to that end. On his view, this memo's recommendation is only justified if the grower payment increases long-run value.

The answer is that the obligation is bounded and priced. It does not give managers a vague mandate to balance growers against owners; it specifies a payment, calculated by formula, for a defined event. Managers remain accountable for value in every other decision. Friedman (2007) allowed that firms operate within the rules of the game; paying for a loss the firm itself causes fits within honest dealing, even if no law requires it.

Who Loses Most

Under Option B, shareholders absorb the largest share, about $204,000 in an average year and about $500,000 in a bad one, roughly 0.5 to 1.2 percent of 2025 operating income. I accept this outcome because the obligation arises from decisions management makes on shareholders' behalf, and the benefit of flexible supply has flowed to them. Hart and Zingales (2017) argued that companies should serve shareholders' welfare, which includes their ethical concerns, rather than market value alone; owners who would object to the company shifting its own scheduling losses onto growers can reasonably be asked to carry this cost.

Next Step

I recommend a board discussion in April, before contracts for the 2026 season are finalized.

References

Friedman, M. (2007). The social responsibility of business is to increase its profits. In W. C. Zimmerli, M. Holzinger, & K. Richter (Eds.), Corporate ethics and corporate governance (pp. 173-178). Springer. https://doi.org/10.1007/978-3-540-70818-6_14

Hart, O., & Zingales, L. (2017). Companies should maximize shareholder welfare not market value. Journal of Law, Finance, and Accounting, 2(2), 247-275. https://doi.org/10.1561/108.00000022

Jensen, M. C. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12(2), 235-256. https://doi.org/10.2307/3857812