The Swan Valley Vineyard
Introduction
In a business venture, companies face some issues and problems that need to be addressed. There are decisions to be made in the business for its success. In the decision making process, managers should be careful in their making of decisions. Careful decisions would allow business to grow. Risks and uncertainties should be evaluated carefully. There are also some opportunities that business faced that may be good or bad for the business if manager would be evaluate carefully the decision made carefully.
This paper would evaluate some of the issues and opportunities that the Swan Valley Vineyard faced. The paper also attempts to recommend some of the decisions that the vineyard should adopt by computing necessary informations tat need to be addressed.
Background
The Swan Valley Vineyard is partnership business that has opened on July 1, 2005 in the Swan Vally region south of Perth. The vineyard currently produces three products which include sweet Shiraz, late harvest Chenin and a Dessert wine. The vineyard’s produce is intended to be distributed to the city retailers and from the winery itself which is located 40 kilometers from the city center. The business started with a total investment of 0,000 which is contributed by four partners. Three of them invested ,000 each and the fourth invested 0,000. they have employed a full time manager to operate the vineyard since none of the partners will work full time in the business.
The vineyard faces a number of serious issues and opportunities which are urgently needed to be addressed. Below are some of the issues and opportunities which are given such alternatives and with the attached calculations and recommendations for each of the given issues.
Task One
Profitability of Shiraz
The vineyard is concerned with the potential profitability of Shiraz. It is believe that it has a strong growth potential. Below are some alternatives which are taken into consideration to increase the profit of this product line. Given below is the informations of estimated costs and level of sales of this product for the next 12 months. Alternatives and its analysis and computation are also shown.
To make these given figures more comprehensive, let’s put these figures on an income statement.
Income Statement of Shiraz
Sales ,000
Less: Expenses
Direct Labor 10,000
Direct Materials 9,000
Reticulation of Vines 5,000
Fertilizer 3,000
Fixed Selling & Admin. Costs 7,000
Sales Commission 5,670
Packaging 7,000
Insurance 5,000
Total Expenses 51,670
Net Income ,330
Alternative One
Raise the selling price of Shiraz by 5% and spend an additional ,000 to promote the product. This strategy is estimated to increase sales by 12%.
Analysis
Increasing the price of Shiraz by 5% would mean than an additional of .75 would be added to the original selling price of which means the new selling price would be equal to .75. An increase in sales by 12% would mean additional sales of 720 bottles of Shiraz to a total of 6720 bottles of Shiraz sold which would mean a total sales of 5,840. Below is the new income statement given the changes made with the alternative one.
Income Statement of Shiraz
Sales 5,840
Less: Expenses
Direct Labor 10,000
Direct Materials 9,000
Reticulation of Vines 5,000
Fertilizer 3,000
Fixed Selling and Admin. Costs 7,000
Sales Commission 6,350.40
Packaging 7,000
Insurance 5,000
Promotion 10,000
Total Expenses 62,350.40
Net Income $ 43,489.60
From this income statement we would notice that there is an increase in the net income of Shiraz. The net income of Shiraz increased by ,159.60 which is 13.46% higher compared to the original net income.
Alternative Two
Spend ,000 on the promotional exercise to position Shiraz in a new market. To succeed in this new market, there is a need to re-design the packaging. The additional cost of the new packaging, to be applied to Shiraz bottles sold in all markets, would be .90 per bottle. This strategy is anticipated to increase sales of Shiraz by 30%.
Analysis
An anticipated 30% increase in sales would mean additional sales of 1,800 bottles of Shiraz to a total of 7,800 bottles of sales. Sales would be amounted to 7,000. An additional cost of packaging of .90 per bottle would increase the packaging costs to ,400. Below is a new income statement for Shiraz in this alternative.
Income Statement of Shiraz
Sales 7,000
Less: Expenses
Direct Labor 10,000
Direct Materials 9,000
Reticulation of Vines 5,000
Fertilizer 3,000
Fixed Selling and Admin. Costs 7,000
Sales Commission 7,020
Packaging 12,400
Insurance 5,000
Promotion 25,000
Total Expenses 83,420
Net Income $ 33,580
From the income statement above, it can be notice that the net income has decreased from the original income estimated income statement by ,750.
In order to find out the profitability of the two alternatives, net profit margin is being used. Net profit margin is computed by dividing net income by sales multiplied to 100 as shown below.
Alternative one
Net profit margin = net income / sales (100)
= ,489.60 / 5,840 (100)
Net Profit margin = 41.09%
Alternative Two
Net profit Margin = net income / sales (100)
= ,580 / 7,000 (100)
Net profit margin = 28.70%
Comparing the two alternatives, it is noticed that alternative one is more profitable than alternative two. Alternative 2 may caused a large increase in sales, however, a large amount of expenses incurred has decreased the profitability of the product. It is recommended the Swan Valley Vineyard should adopt alternative 1 since the alternative is more profitable.
Task Two
Project Evaluation
It is estimated that an area of the property will not be required for growing grapes for at least ten years and therefore proposed to use this land to provide wedding ceremonies and reception facilities. The land in questioned could be landscaped to provide a tranquil and scenic area for wedding ceremonies while a reception center could be built adjacent to this area to cater the customers who also wish to hold their reception on the property.
Based on the information obtained, it is estimated that the cost to build the reception center will be 0,000, while the cost of building gazebo, landscaping the garden and building a large pond will be ,000, ,000 and ,000 respectively. In a deal with the builder, payment of building the reception center will be made only until the work has been done. The building of the reception area and the surrounding area would take 12 months to complete. The gazebo, landscaping and the construction of pond would require immediate payment. Given below is the estimated net cash flow for ten years.
To evaluate if the expansion should be undertaken, a project evaluation is being done. Net present value is the method used. Net present value is a standard method for evaluating completing long term projects in capital budgeting. It measures the excess and downfall of cash flows, in the present value terms. Projects with positive NPV should be undertaken.
The Net Present Value (NPV) of a project or investment is defined as the sum of the present values of the annual cash flows minus the initial investment. The formula used in computing NPV is shown below.
Source: Odellion Research
Where:
t = number of years representing the lifetime of the project
r = rate of return which is usually referred as the company’s cost of capital
Given the following estimates of the net cash flows over the next ten years, we compute the Present values in each year.
Year
Net Cash Flow
Present Value
1
6,0000
5,357.14
2
24,000
17,857.14
3
33,000
21,922.83
4
38,000
22,539.70
5
43,000
22,772.73
6
45,000
21,278.51
7
54,000
22,798.40
8
59,000
22,240.65
9
66,000
22,213.58
10
68,000
20,434.57
Total PV
199,415.25
Having computed the present value we can now compute the net present value using the formula given above. Initial investment is usually negative since it involves cash outflow.
Solution:
Given: t = 10
I = 0,000 for reception building,
$ 8,000 for building gazebo,
$ 18,000 for landscaping the garden,
$ 15,000 for building large pond
I = 1,000
r = 12%
Formula:
NPV = -I + the sum of PV
NPV = -291,000 + 199,415.25
NPV = -101,584.75
Having evaluated the expansion project using the NPV method of project evaluation, it has resulted to a negative value which means that the planned project should not be undertaken.
Task Three
In May, Liquor Barons, a local liquor retailer urgently requires 800 bottles of the Chenin for its store. Liquor Barons offered to purchase 800 bottles from the business at a price of .50 per bottle. If this offer is accepted, there will be no additional selling and administration costs (variable and fixed), however producing extra 800 bottles of Chenin will reduce May’s production of Dessert wine by 600 bottles. Currently Chenin is sold to retailers for per bottle and dessert wine is sold at per bottle. The costs associated with each product are as follows:
Variable selling expenses are forecast to be .80 per bottle for the Chenin and .60 per bottle for dessert wine. Fixed selling and administration costs are ,000 per month. Currently, operation is at full capacity, producing and selling 8,000 bottles of Chenin and 6,000 bottles of dessert wine each month.
In order to evaluate if the offer from Liquor Baron should be accepted, net income is determined.
Income Statement for Chenin and Dessert Wine (without the offer)
Sales
Chenin (8000 @ ) 192,000
Dessert Wine (6,000 @ ) 120,000
Total Sales 312,000
Less: Cost of Goods Sold
Chenin 137,600
Dessert Wine 66,000
Total CGS 203,600
Gross Profit 108,400
Less: Operating Expenses
Variable Selling Expenses
Chenin 6,400
Dessert wine 3,600
Fixed selling and Admin. Costs 28,000
Total Expenses 38,000
Net Income 70,400
Income Statement of Chenin and Dessert Wine (with Liquor Baron’s offer)
Sales
Chenin
8,000 @ 192,000
800 @ .50 17,200
Dessert wine (5400 @ ) 108,000
Total Sales 317,200
Less: Cost of Goods Sold
Chenin 151,360
Dessert Wine 59,400
Total CGS 210,760
Gross Profit 106,440
Less: Operating Expenses
None
Net Income 106,440
From the results of the income statement of the Swan Valley, it is recommended that Swan Valley Vineyard should accept the offer of Liquor Barons because the price may have been lower than the regular price of Chenin and may have interfere the production of Dessert Wine, it would be more profitable because operating costs are deducted.
In February, Liquorland Ltd. offered to purchase an 800 bottles of Chenin @ per bottle. At the time of offer, production was below full capacity and the offer could have been meet without interfering the production of dessert wine, which during February was 5,000 bottles per month. To determine whether the offer should have been accepted, net income is determined.
Income Statement for Chenin and Dessert Wine (without offer of Liquorland LTD.)
Sales
Chenin
5,000 @ 120,000
800 @ 12,000
Dessert wine (5,000 @ ) 100,000
Total Sales 232,000
Less Cost of Goods Sold
Chenin 99,760
Dessert wine 55,000
Total CGS 154,760
Gross Profit 77,240
Less: operating expenses
Variable Selling Expenses
Chenin 4,000
Dessert wine 3,000
Fixed Selling and Admin. Costs 28,000
Total Expenses 35,000
Net Income 42,240
Income Statement for Chenin and Dessert Wine (with offer of Liquorland LTD.)
Sales
Chenin
5,000 @ 120,000
800 @ 12,000
Dessert wine (5,000 @ ) 100,000
Total Sales 232,000
Less Cost of Goods Sold
Chenin 99,760
Dessert wine 55,000
Total CGS 154,760
Gross Profit 77,240
Less: operating expenses
None 0
Net Income 77,240
With the offer of the Liquorland Ltd., it would have been accepted since it still entails a greater profits for the business compared at a normal production.
Conclusion
The Swan Valley Vineyard has faced several issues and opportunities that has been addressed. The business has faced with an opportunity of higher sales which includes promotional activities. It has been computed through determining the net income and also computing the profitability of the given alternatives. It has been recommended that the company should adopt the first alternative which more profitable than the second alternative.
With the issue on expansion of the business, it has recommended that the company should not undertake the expansion project since from the evaluation through the use of net present value it would not be profitable.
Moreover, with third issue it has been recommended that the company should have been accepted the offer of Liquorland Ltd. because even if the price offered is less it still give a greater profit than the normal operations since operating expenses is deducted. Similarly with the current offer of the Liquor Barons, the company should accept the offer since it also entails greater profits for the company through the deduction of operating expenses.
Credit:ivythesis.typepad.com
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