total $75,000. CASE QUESTIONS 1. Contribution margin analysis: Create a single company- wide contribution margin income statement for AVS that includes each expense category. Also, calculate the weighted-average revenue and weighted-average operating margin for one bottle of wine. (Note: Do not break out the variable or the fixed costs by type of wine.) 2. Decision analysis: Another grower has available 20,000 pounds of Chardonnay grapes from the 2009 harvest. AVS has the opportunity to buy the juice from these grapes (they have already been harvested and crushed). a. If AVS could blend these grapes with the generic white grapes (using the 2:1 blend formula) to produce a new Chardonnay wine to be priced at $14/bottle, and required a 15% return on sales for this wine, what is the maximum amount that AVS would pay for a pound of grapes? b. Other than the cost of the grapes, what factors would you consider to support your purchase of the additional grapes, and what factors would cause you to reject buying the grapes? (Note: Question 3 from original case was deleted) Exhibit 1 A Votre Sante income statement -2010 Revenues Product Costs Grapes Bottle, Labels, Corks Harvest Labor Lab Expenses $ 848,000 $124,000 122,500 18,000 Crush Labor 3,000 Indirect Materials 6,329 Depreciation 8,100 8,000 Production Office 12,000 Utilities 5,500 Waste Treatment 2,000 Wine Master 15,000 55,000 4,725 $384,154 45.3% $463,846 54.7% Supervisor Barrels Total Product Costs Gross Margin Administrative & Sales Costs Administrative Rent & Office $ 20,000 Liquor Taxes 147,000 Sales Commissions 98,000 Sales Manager 30,000 Administrative Salary 75,000 Total Administrative & Sales Costs $370,000 Operating Margin $ 93,846 11.1% 3 IMA EDUCATIONAL CASE JOURNAL VOL. 4, NO. 2, ART. 1, JUNE 2011 PRODUCT INFORMATION Data related to the three AVS wines is as follows: . Chardonnay-Estate contains only Chardonnay grapes that are grown for AVS at the family vineyards. The 2010 sales projection for Chardonnay-Estate wine was estimated to be 24,000 bottles at an average sales price of $22 per bottle. 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 average sales price is $16/bottle. Blanc de Blanc wine is made from all remaining generic white grapes. The average 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 sales projection, and 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. . ADDITIONAL OPERATIONAL AND COST DATA CHARDONNAY GRAPES 2009 harvest: 100,000 pounds . purchase price: $85,500 expected loss in volume through fermentation: 10% GENERIC WHITE GRAPES . 2009 harvest: 60,000 pounds purchase price: $38,500 expected loss in volume through fermentation: 5% WINEMAKING Chardonnay grapes are fermented in oak barrels; each barrel results in the production of 40 cases of wine. Barrels cost $500 apiece. Because the barrels lose some of their oak flavorings each use, AVS uses the barrels for four years and then sells them to other wineries for $200. AVS's current barrels have been used for four years, so AVS will purchase all new barrels for the 2009 harvest. Generic white grapes are fermented in the holding tank; the tank can hold up to the equivalent of 2,000 cases of wine. BOTTLING Requires 36 pounds of grapes (post-fermenting) for one case (12 bottles) of wine In the bottling process, the wine is put into bottles, with both corks and labels added during this process. The materials cost associated with the bottles, corks, and labels averages $2.50/bottle. DIRECT LABOR Harvest labor is paid an average of $9.00/hour. An average of 80 pounds of grapes can be harvested each hour. Crush labor is paid an average of $10.00/hour. The crushing process typically takes 300 hours to complete. OVERHEAD EXPENSES Administrative rent and office expenses: currently $20,000 annually. Depreciation is charged based on the following equipment schedule: Equipment Tractors Crushers Holding Tank Bottle Lines Other Production Equipment Cost Est. Life $15,000 10 years $6,000 10 years $40,000 20 years $10,000 10 years $15,000 5 years Indirect materials - Part of the winemaking process involves introducing yeasts and other additives into the wine to help the fermentation process and to help balance the flavors in the wine. Indirect production materials average $1.55 per case of wine. Lab expenses - Lab expenses of $8,000 are incurred for lab supplies and equipment. The lab is used by the production supervisor and the wine master to test the grapes and wine at various stages of production. Liquor taxes - AVS is required to pay a liquor excise tax of $3/bottle on every bottle of wine sold. Production office - AVS pays a part-time employee to help administer the production function. This employee orders supplies, reviews and approves production invoices, and performs other administrative functions. The production office budget is $12,000 annually. Sales and related - Kay's sister, Maria, is paid $30,000/year on a contract basis to sell AVS wines. She works through distributors, who are paid $2/bottle for each bottle sold. Supervision - Kay's brother, Albert, supervises the production of wine from the harvest through the bottling processes. His salary and benefits total $55,000 annually.