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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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Frequently asked questions
Why is the boxed wine division unprofitable?
Boxed wine uses the same high-cost grapes as bottled wine but earns less revenue per litre. Despite its higher volume, the cost-to-price ratio causes a loss of AUS$0.50 per unit, compared to a AUS$1.50 profit per bottled wine unit.
How do costs differ between bottled and boxed wine?
Bottled wine has lower raw material costs (AUS$2) versus boxed wine (AUS$8). Both products have equal packaging and overhead costs, but boxed wine incurs higher labour and distribution costs. The cost mismatch affects boxed wine profitability.
What is the current profit or loss for each product?
Bottled wine yields a profit of AUS$1.50 per unit. Boxed wine, however, results in a loss of AUS$0.50 per unit due to its higher grape and handling costs despite higher volume per sale.
What strategy can improve boxed wine profitability?
The company should use lower-cost grapes for boxed wine, as this segment likely targets more price-sensitive consumers. Aligning raw material costs with market expectations can help convert losses into positive margins.
Why shouldn't boxed wine use the same grapes as bottled wine?
Boxed wine serves a value-driven market, where high-end grape quality isn’t a priority. Using the same premium grapes as bottled wine drives up costs unnecessarily, hurting margins in the boxed segment.
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