Case Study: Vista View Wines
Vista View Wines (VVW) is a large vineyard that produces a host of varietal wines (premium reds and whites) and fortified wines. Fortified wines such as brandy, vermouth, sherry, madeira, and port consist of wine with additional distilled products. Besides sourcing grapes for its wines from its own vineyard, VVW purchases grapes from surrounding vineyards. VVW is organized around two profit centers: Wines (all of the premium wines) and Ports (all of the fortified wines). A case of wine or fortified wine is sold as soon as it is produced. Each profit center faces its own demand curve as depicted below, and each profit center has different and distinct marketing and distribution channels. Wines sells its products by private labeling them to hotels, whereas Ports sells its fortified wines to liquor stores.
VVW purchased 5,000 tons of grapes that were then crushed and the juice from the first and second pressings was used by Wines and the juice from the third and fourth pressings was used by Ports. Each subsequent pressing applies more pressure, and the resulting juice contains more impurities. The cost of the grapes (including pressing) amounted to $5 million and these costs are recovered from Wines and Ports using predetermined rates based on the budgeted number of juice gallons used in the cases produced (and sold). Based on their budgeted gallons used and cases produced, Wines is charged $19 per case and Ports $13 per case to recover the grape and pressing costs of $5 million. (Grape and pressing cost is charged to each of the two profit centers.)
In addition to the grape and pressing cost, Wines and Ports incur variable costs to ferment, age, bottle, package, and distribute their products. Wines incurs variable costs of $25 per case and Ports incurs $20 of variable costs per case. Wines and Ports have separate fermenting, packaging, marketing, and distribution channels and incur their own fixed costs ($6.3 million by Wines and $2.8 million by Ports). The managers of Wines and Ports are compensated based on the profits of their individual operation, which is calculated based on their own revenues, variable and fixed costs, and the grape and pressing costs.
Case Study: Vista View Wines
- How many cases of wines do you expect Wines to produce, and how many cases of fortified wines do you expect Ports to produce?
- Based on your calculations in part (a), how much profit will Wines and Ports report?
- If central management has the same knowledge of the demand conditions as Wines and Ports and makes the Wines and Ports price-quantity decisions to maximize firm profits instead of allowing each division to make its own price-quantity decision, would the same price-quantity decisions be made? Justify your answer with supporting calculations and analyses.
- Explain why your answers in part (a) and (c) are the same or different.
- Assuming that VVW continues to maintain its decentralized organizational structure and continues to compensate its Wines and Ports managers based on their own profits as described in the problem, what, if any, changes would you recommend VVW make in the way profits of each profit center is calculated?
Use Chapter 8 PowerPoint. APA format.