Sonoma Wines - Case Study Example

Sonoma Wines Case study Sonoma Wines Case study $10,000 will be used to finance initial purchase of grapes which will constitute the first wine batch. Preliminary planning horizon is two years. Original grape cost per bottle is given as follows, Year 1 Year 2 Petite Sirah $ 0.80 $ 0.75 Sauvignon Blanc $ 0.70 $ 0.85 Price per bottle is given as follows, Year 1 Year 2 Petite Sirah $ 8.00 $ 8.25 Sauvignon Blanc $ 7.00 $ 7.00 Advertising cost per bottle, Year 1 Year 2 Petite Sirah $ 0.20 $ 0.17 Sauvignon Blanc $ 0.13 $ 0.10 Assuming cash made from sales in the first year is available for the second year, the number of Petite Sirah bottles sold annually is within the range of 40% and 70%. Additionally, year 2 grapes will be purchased in year 2. The answer to the problem is formulated as two integer linear programming problems, one for the 1st year and the other for the 2nd year. For the first year, t = 1 Available funds = $ 10,000 For brand Petite Sirah the cost for grape is $0.80 per bottle and for Sauvignon Blanc the cost for grape is $0.70 per bottle. Additionally, it is provided that for a dollar spent in promoting Petite Sirah, produces a demand for 5 bottles and a dollar spent in promoting Sauvignon Blanc, produces a demand for 8 bottles . This means the advertisement cost per bottle for Petite Sirah is $0.20 and the advertisement cost per bottle for Sauvignon Blanc is $0.125. The cost-profit structure of the two targeted brands during the 1st year is as follows. Grape cost Advertisement cost Total cost Selling Price Profit Petite Sirah $ 0.80 $ 0.20 $ 1.00 $ 8.00 $ 7.00 Sauvignon Blanc $ 0.70 $ 0.125 $ 0.825 $ 7.00 $ 6.175 Suppose x bottles of Petite Sirah and Y bottles of Sauvignon Blanc are produced, total profit function is maximized as shown below, Question 1: Determine how many grapes to purchase, how much money to be spent on advertising, how many bottles of wine to sell, and how much profit George can expect to earn over the two year period Year Petite Sirah bottles produced Sauvignon Blanc bottles produced Profit 1 4,469 6,704 2 62,457 26,767 692,645 It assumed that, in addition to the bottle left in year 2, all those produced in year 1 will as well be sold. Year Grape costs Advertising costs Demand generated (PS) Demand generated (SB) 1 $ 8,268 $ 1,732 $ 4,469 $ 6,704 2 $ 69,595 $ 13,086 $ 62,457 $26,767 QUESTION 2: The loan officer estimates that the price used for Sauvignon Blanc in the second year is highly speculative and realistically might only be the price George calculated. 50% decline in Sauvignon Blanc price in year 2 produces a 13.5 % decline in estimated profits. This should not deter acquisition of bank loan. The business is expected to retain solvency and be profitable. Original profit New Profit Profit change $ 692,645 $ 598,959 -13.5% QUESTION 3: If holding charges are $ 0.10 per bottle per year, how much, if any, does George’s plan change? Due to the fact that all produced bottles are expected to be sold, George’s plan remains unaltered by inventory. The holding charge of $0.10 per bottle per year affects the plan only where the bottles sold are lower than the production in either year. QUESTION 4: The cost of grapes might go up by anywhere from 50% to 100%. How migt this affect George’s plan? The rise in grape prices due to striker over unionization of grape workers could significantly affect the plan. Optimal profits will be as low as $198,841 due to a 100% cost increment. At 50% cost increase, expected profits will only be $339,877. As a matter of fact, every 10% cost increase results into approximately 10% decrease in profits. Year 1 bottles produced Year 1 bottles Sold Year 2 bottles produced Unit influence factor Total profit at end of year 2 Petite Sirah Sauvignon Blanc Petite Sirah Sauvignon Blanc Petite Sirah Sauvignon Blanc 0.5 $339,877.4 $3,162 $ 4,743 $3,162 $ 4,743 $ 31,100 $13,329 0.6 $302,055.1 $2,987 $ 4,481 $2,987 $ 4,481 $ 27,738 $11,888 0.7 $270,050.1 $2,831 $ 4,246 $2,831 $ 4,246 $ 24,893 $10,669 0.8 $242,727.7 $2,690 $ 4,035 $2,690 $ 4,035 $ 22,465 $ 9,628 0.9 $219,217.2 $2,562 $ 3,844 $2,562 $3,844 $ 20,375 $ 8,732 1.0 $198,841.0 $2,446 $ 3,670 $2,446 $3,670 $ 18,564 $ 7,956 Profit per scenario Read More