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Question(s) / Instruction(s):

À Votre Santé: Product Costing and

Decision Analysis in the Wine Industry

Priscilla S. Wisner

University of Tennessee

 

 

Required:

1              Contribution margin analysis: Create a single company-wide contribution margin income statement for AVS that includes each expense category. Also, calculate the weighted-average revenue and weighted-average operating margin for one bottle of wine. (Note: Do not break out the variable or the fixed costs by type of wine.)

2.            Decision analysis: Another grower has available 20,000 pounds of Chardonnay grapes from the 2009 harvest. AVS has the opportunity to buy the juice from these grapes (they have already been harvested and crushed).

a. If AVS could blend these grapes with the generic white grapes (using the 2:1 blend formula) to produce a new Chardonnay wine to be priced at $14/bottle, and required a 15% return on sales for this wine, what is the maximum amount that AVS would pay for a pound of grapes?

b. Other than the cost of the grapes, what factors would you consider to support your purchase of the additional grapes, and what factors would cause you to reject buying the grapes?

3.            Product profitability analysis: Kay would like to be able to better assign costs to each of AVS’s products, and has collected the following information about AVS activities.

• Harvesting activity – The Chardonnay grapes can be harvested at the average rate of 71.5 pounds/hour, while the generic white grapes are harvested at the rate of 100 pounds/hour. Harvesting includes costs related to tractors and harvest labor.

• Crush activity – Relates to the pounds of grapes crushed. Includes costs of crusher equipment and crush labor.

• Fermenting activities – Barrel costs relate to the Chardonnay wines by the percentage of wine used in each wine type. Holding tanks relate to the Blanc de Blanc and the regular Chardonnay wines by the percentage of wine used in each wine type.

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