Classic Pen Company Case

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A VOTRE SANTÉ: PRODUCT COSTING AND DECISION ANALYSIS IN THE WINE INDUSTRY

Priscilla S. Wisner
Department of Accounting and Information Management College of Business University of Tennessee 638 Stokely Management Center Knoxville, TN 37996 Phone: 865.974.1714 Email: pwisner@utk.edu

Case: A Votre Santé Page 1 of 17

Electronic copy available at: http://ssrn.com/abstract=1659912

BACKGROUND A Votre Santé (AVS) is a small, independent winery owned by Kay Aproveche. Kay has a relationship with a grower who grows two types of wine grapes, a Chardonnay and a generic white grape. AVS buys the grapes at the point that they have ripened on the vine. AVS is responsible for harvesting the grapes and all further processing of the grapes into wine. In 2010, AVS earned an operating margin of almost $100,000 on sales of $848,000, for an 11.6% margin (see Exhibit 1). The process of winemaking is fairly simple, yet requires much attention to process details. After the grapes are harvested, they are brought to the winery for washing and crushing. The crushing process separates the juice from the pulp, skin and stems. The juice is used to make the wine; the pulp, skin and stems are recycled back onto the fields whenever possible or otherwise disposed of. The amount of wine generated from the grapes is dependent each year on a number of climatic and growing factors such as temperature, length of growing season, rootstock and fertilizers used. Once the juice is extracted, it moves into the fermenting process. The Chardonnay wine grape is fermented using oak barrels; the oak in the barrels gives flavor to the Chardonnay wine. The barrels are expensive ($500 each), but are sold after four years for $200 apiece to another smaller winery. The juice fermenting in each barrel results in the production of 40 cases of wine. The generic white grape juices are fermented in a holding tank; a full tank would result in the production of 1,500 cases of wine. The fermenting process takes place in a temperaturecontrolled environment; however, each fermenting method results in some wine loss through evaporation. Kay Aproveche estimates that the Chardonnay will lose approximately 10 percent of its volume through the fermentation process, while the generic white will lose approximately 5 percent of its volume. Harvest takes place in the late summer and early fall months; typically, the time elapsed from harvest to final sale is about 11 months. Case: A Votre Santé Page 2 of 17

Electronic copy available at: http://ssrn.com/abstract=1659912

PRODUCT INFORMATION AVS bottles three wines: a Chardonnay-Estate, a regular Chardonnay and a Blanc de Blanc. Data related to the three wines is as follows: Chardonnay-Estate contains only Chardonnay grapes that are grown for AVS; the expected sales price is $22/bottle. The market demand for Chardonnay-Estate wine is estimated to be 24,000 bottles for 2010. Regular Chardonnay is blended by combining the Chardonnay wine left over after bottling the Chardonnay-Estate with the fermented generic wine; the blend mixture is two parts Chardonnay grapes and one part generic grapes. The expected sales price is $16/bottle. Blanc de Blanc wine is made from all remaining generic white grapes; the expected sales price is $11/bottle. All three wines are bottled at AVS using one bottling line. In a typical year, AVS bottles enough Chardonnay-Estate to meet the predicted market demand, then bottles the regular Chardonnay after blending all remaining Chardonnay wine with the necessary amount of generic grapes. The Blanc de Blanc is the last wine to be bottled, using all remaining generic white grapes. Kay again expects the wines from this harvest year to sell out.

ADDITIONAL OPERATIONAL AND COST DATA Chardonnay Grapes 2009 harvest - 100,000 pounds purchase price of $85,500 expected loss in volume through fermentation and bottling – 10% Case: A Votre Santé Page 3 of 17

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