The storm is coming. Harvest Riesling grapes immediately or not, Mr. Jaeger needs to evaluate the risk and the expected revenue related to different options. Our recommendation is that to maximize the sales revenue, Mr. Jaeger should not harvest Riesling grapes right now but wait for a better profit given by rainstorm.
We recognized that the selling price of the wines made by three grapes, Cabernet Sauvignon, Chardonnay and Riesling might be different, but after considering the huge different in sales volumes, 25,000 cases vs. 1000 cases, we think that any decision on Riesling has little impact on company’s revenue as a whole. So we only evaluate the expected revenue which is associated to different options and assume that the risk is not our primary concern. We also ignore the factor of vinification costs because not enough information is provided in the case.
The decision tree (see Exhibit) offers two options for Mr. Jaeger. Option a) is to harvest immediately. It will bring $2.85 (multiply the number of bottles) revenue to Freemark Abbey Winery. The option b) is more complicated since we need to consider the probabilities of several events. For example, the probability of whether the rainstorm comes. For the comparison of option a) and b), we calculated EMVs to analyze the outcomes of different events. Generally speaking, there are two events in option b), rainstorm or no rainstorm. For rainstorm, there is a 0.4 probability to get a favorable result, the grapes botrytis. But there is also a 0.6 probability to get a ruined vineyard. If that happens, Mr. Jaeger either sells the wine at $2.0 per bottle, or accepts a 50% revenue deduction to protect the company reputation. For no rainstorm, Mr. Jaeger has a 0.4 probability of achieving a selling price of $3.5, a 0.4 probability to be able to sell at $3.0 per bottle and a 0.2 probability to get $2.5 per bottle. We calculated all EMVs for him as follows:
Note: We don’t multiply the number of bottles...
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