TASK: The controller for Canandaigua Vineyards, Inc. has predicted the following costs at various levels of wine output.
| Canandaigua Vineyards, Inc. |
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Wine Output (.75-Liter Bottles) |
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10,000 Bottles |
15,000 Bottles |
20,000 Bottles |
| Variable production cost |
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$35,000 |
$52,500 |
$70,000 |
| Fixed production cost |
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|
100,000 |
100,000 |
100,000 |
| Variable selling and administrative costs |
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|
2,000 |
3,000 |
4,000 |
| Fixed Selling and administrative costs |
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|
40,000 |
40,000 |
40,000 |
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| Total |
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|
|
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$177,000 |
$195,500 |
$214,000 |
The company's marketing manager has predicted the following prices for the firm's fine wines at various levels of sales.
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WINE SALES |
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10,000 Bottles |
15,000 Bottles |
20,000 Bottles |
| Sales price per .75 liter bottle |
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$18.00 |
$15.00 |
$12.00 |
1. Calculate the unit costs of wine production and sales at each level of output. At what level of output is the unit cost minimized?
2. Calculate the company's profit at each level of production. Assume that the company will sell all of its output. At what production level is profit maximized?
3 Which of the three output levels is best for the company?
4. Why does the unit cost of wine decrease as the output level increases? Why might the sales price per bottle decline as sales volume increase.