Azienda Vinicola Italiana Case

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  • Topic: Variable cost, Costs, Cost
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  • Published : January 26, 2013
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BACKGROUND OF THE STUDY
Azienda Vinicola Italiana produced and bottled wines. The company did not buy grapes but rather bought either mosto or bulk wine. They have seen that this policy had the disadvantage that the firm could not assure itself of a consistently high-quality product. Moreover, the administrative manager wished to re-organize the firm in order to exploit its productive capacity to the utmost and, above all, to increase the net profit, which the owners did not consider satisfactory. The administrative manager assumed a maximum capacity of 900,000 bottles a year which would be equivalent to Lit 1,980 million. The administrative manager decided, therefore, to try to discover a way to change costs and revenue so as to obtain a profit of 176 million. I. PROBLEM STATEMENT

How to re-organize the firm to achieve a profit of Lit. 176 million a year, which would be almost 9% of sales of Lit 1,980 million? II. OBJECTIVES
a. to show the changes in income statement when selling price is assumed to increase. b. to show the changes in income statement when fixed costs are assumed to decrease. c. to show the changes in income statement when variable costs are assumed to decrease. d. to purchase grapes instead of mosto or bulk wine to ensure the quality of the product.

A. The presentation below shows the Income Statement using the contribution margin approach to have a better view on the costs which are variable and fixed

AZIENDA VINICOLA ITALIANA
Income Statement
(Contribution Margin Approach)
For the Year 1993

Production Capacity – 871,850 bottles
Unit CostIn Lire SALES2,203.791,921,370,000.00
Less: Variable Costs
Labor Cost245.78214,282,000.00
Raw Materials690.8602,272,000.00
Axiliary Materials451.36393,514,000.001,210,068,000.00
Contribution Margin815.85711,302,000.00
Less: Fixed Costs
Labor Cost142,854,000.00
Staff Salaries118,196,000.00
General Manufacturing Expenses52,744,000.00
General Administrative Expenses66,000,000.00
Advertising Expense86,900,000.00
Interest82,500,000.00
Depreciation115,940,000.00665,134,000.00
Net Income46,168,000.00
Contribution Margin Ratio (Contribution Margin/Sales)37.02% BEP in Sales815,261.24
BEP in Lire1,796,660,931.05

B. By accepting the administrative manager’s estimate of cost allocation between fixed and variable, the chart below shows the changes of the total variable cost and the increase of sales revenue. As production increases so as the total variable cost increases. The break-even in sales volume and the profit at full capacity is also shown below.

AZIENDA VINICOLA ITALIANA
Income Statement
(Contribution Margin Approach)
For the Year xxxx

Production Capacity - 900,000
Unit CostIn Lire
SALES2,200.001,980,000,000.00
Less: Variable Costs
Labor Cost245.78221,202,000.00
Raw Materials690.8621,720,000.00
Axiliary Materials451.36406,224,000.001,249,146,000.00
Contribution Margin812.06730,854,000.00
Less: Fixed Costs
Labor Cost142,854,000.00
Staff Salaries118,196,000.00
General Manufacturing Expenses52,744,000.00
General Administrative Expenses66,000,000.00
Advertising Expense86,900,000.00
Interest82,500,000.00
Depreciation115,940,000.00665,134,000.00
Net Income65,720,000.00
BEP in Sales Volume819,070.02
(Total Fixed Costs/Contribution Margin per unit)

III. ALTERNATIVE COURSES OF ACTION
ACA 1: Assumes that selling price increase
AZIENDA VINICOLA ITALIANA
Income Statement
(Contribution Margin Approach)
For the Year XXXX
Production Capacity- 900,000 bottles

Unit CostIn Lire

Sales 2,322.53 2,090,280,000.00
Less: Variable Cost
Labor Cost245.78 221,202,000.00
Raw Materials690.80...
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