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Analysis of Daniel Dobbins Distillery Inc. Case.
Title: Analysis of Daniel Dobbins Distillery Inc. Case.
Because of the market forecast that the demand of straight whiskey will be doubled from 1987 to 1995, the board of Daniel Dobbins Whiskey Inc decided to increase the production of whiskey in 1988 by 50% of the 1987 volume to meet the anticipated increase in consumer demand from 1991 through 1995. The manufacturing process of whiskey can be divided into two stages. Under the first stage which consists of several different steps, raw materials are converted into a clear liquid with a sharp, biting taste. The second stage which is also called ‘Maturing or Aging Process’ involves maturing or aging for a minimum of four years under controlled temperature and humidity conditions. Because of the increase in cost of production in 1988, which will generate revenues only in 1991, the income statement of Daniel Dobbins Inc showed a net loss of $814000 which was a significant change from net profit of $1504000 in 1987. In order to get loan of $3 million from Ridgeview National Bank of Nashville, the point of consideration for COO of Daniel Dobbins Distillery is how to present the financial results of 1988 to the bank. This loan is critical for company to remain solvent. One of the key issues in this case is how to divide the increased costs in 1988 between ‘Inventoriable costs’ and ‘Period costs’. According to the case, while preparing the income statement in 1988, the costs of first stage was included under inventoriable costs and costs of second stage was included under Period costs which resulted in net loss in 1988. Increase in cost of production in second stage can be attributed to following increase in costs under second stage of manufacturing. a) Increased costs due to increase in the...