Kiwi Cellars has many competitors in the New Zealand domesticpremium wine market. The wines are judged similarly in quality& taste although KC employs different production and marketingmethods. Dissatisfied with its current profitability, KC managementis considering their competitive options. An accounting departmentanalyst compiled the following data for the most recent year tofacilitate our analysis.
Note: Assume that the company sells what itproduces, thus they do not produce wine to hold over ininventory.
KC
BenchmarkCompetitor
Sales price per unit (750 ml bottle)
$8.50
$8.00
Variable materials (grapes, bottles, etc.) per unit
$2.25
$2.75
Variable labor per unit
$1.25
$2.00
Variable production overhead (utilities, etc.) perunit
$1.00
$1.25
Fixed production overhead (depreciation, etc.)
$750,000
$250,000
Marketing, administrative and other fixed costs
$250,000
$150,000
Last yearâs sales in units
350,000
400,000
Capacity in units
500,000
450,000
1. Demand in recent years has been volatile varying from a lowof 200,000 to a high of 400,000 units. As a measure of the impactof this uncertain demand on profit by assuming demand increases ordecreases by 10%.
Interpret the relative changes in profit.
2. Recommend a coherent plan for how KC could increase profit inthe coming year and calculate the resulting profit for yourplan.
Explain your answer, evaluating their current position relativeto your recommendation.
3. Now assume that the data above for Kiwi actually consists oftwo wines with the following data:
KC-Chard
KC-Shiraz
Sales price per unit (750 ml bottle)
$ 7.50
$ 11.00
Variable cost per unit
$ 4.20
$ 5.25
Last yearâs sales in units
250,000
100,000
a. Describe the KC's Unit Level Cost-Volume-Profit (CVP)relationship.
b. Describe the Cost Behavior Analysis - by analyzing the KiwiCellar's business problems.
c. What are the concepts underlying cost-volume-profit analysisfor Kiwi Cellars?
d. What can be said about the Breakeven and Profit Planning ofthe company
e. What can you conclude by conducting an Analysis of OperatingLeverage
Kiwi Cellars has many competitors in the New Zealand domesticpremium wine market. The wines are judged similarly in quality& taste although KC employs different production and marketingmethods. Dissatisfied with its current profitability, KC managementis considering their competitive options. An accounting departmentanalyst compiled the following data for the most recent year tofacilitate our analysis.
Note: Assume that the company sells what itproduces, thus they do not produce wine to hold over ininventory.
KC | BenchmarkCompetitor | |
Sales price per unit (750 ml bottle) | $8.50 | $8.00 |
Variable materials (grapes, bottles, etc.) per unit | $2.25 | $2.75 |
Variable labor per unit | $1.25 | $2.00 |
Variable production overhead (utilities, etc.) perunit | $1.00 | $1.25 |
Fixed production overhead (depreciation, etc.) | $750,000 | $250,000 |
Marketing, administrative and other fixed costs | $250,000 | $150,000 |
Last yearâs sales in units | 350,000 | 400,000 |
Capacity in units | 500,000 | 450,000 |
1. Demand in recent years has been volatile varying from a lowof 200,000 to a high of 400,000 units. As a measure of the impactof this uncertain demand on profit by assuming demand increases ordecreases by 10%.
Interpret the relative changes in profit.
2. Recommend a coherent plan for how KC could increase profit inthe coming year and calculate the resulting profit for yourplan.
Explain your answer, evaluating their current position relativeto your recommendation.
3. Now assume that the data above for Kiwi actually consists oftwo wines with the following data:
KC-Chard | KC-Shiraz | |
Sales price per unit (750 ml bottle) | $ 7.50 | $ 11.00 |
Variable cost per unit | $ 4.20 | $ 5.25 |
Last yearâs sales in units | 250,000 | 100,000 |
a. Describe the KC's Unit Level Cost-Volume-Profit (CVP)relationship.
b. Describe the Cost Behavior Analysis - by analyzing the KiwiCellar's business problems.
c. What are the concepts underlying cost-volume-profit analysisfor Kiwi Cellars?
d. What can be said about the Breakeven and Profit Planning ofthe company
e. What can you conclude by conducting an Analysis of OperatingLeverage
