Introduction
- Our client is the CEO of an Australia-based winemaker that is the market leader in its country.
- Recently, profits have been decreasing, and the CEO believes that this is due to losses in the boxed wine division.
Factors to Consider
- Assessing the profitability of each division
- The types of costs associated with each product
- The pricing and target customer for each product
- The use of the same grapes for both products
Background Information
- The company is currently losing money
- Sales are split evenly between the two divisions
- Bottled wine sells for AUS$5 per unit, Boxed wine sells for AUS$10 per unit
- Bottled wine contains 750ml, Boxed wine contains 3 litres
- Both products have an overhead of AUS$0.50 per unit
- Raw material costs for bottled wine are AUS$2 and AUS$8 for boxed wine
- Packaging costs AUS$1 for both products, while other variables (distribution and labour) are AUS$1 per bottle and AUS$2 per box.
Analysis-
- If the grape cost for bottles is AUS$2, for boxes it is AUS$8 (1:4 ratio)
- Profit for bottles is AUS$1.5; boxes have a loss of AUS$0.5
Conclusion-
- The company should try to source grapes of lower cost for its boxed wine product line.
- The current raw material cost ratio is 1:4 when comparing bottled wine against boxed wine, but the price ratio is only 1:2.
- Boxed wine targets a different market segment and may not require the same quality (and cost) of grapes as bottled wine.
- Lowering the raw material cost for boxed wine could make the line profitable.
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By Vandana Gaur
