Assignment
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.
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WINES
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PORTS
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Number of Cases
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Price
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Number of Cases
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Price
|
|
(000s)
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per Case
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(000s)
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per Case
|
|
160
|
$103.00
|
60
|
$90.00
|
|
170
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$ 99.75
|
70
|
$85.00
|
|
180
|
$ 96.50
|
80
|
$80.00
|
|
190
|
$ 93.25
|
90
|
$75.00
|
|
200
|
$ 90.00
|
100
|
$70.00
|
|
210
|
$ 86.75
|
110
|
$65.00
|
|
220
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$ 83.50
|
120
|
$60.00
|
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.
Required:
a. How many cases of wines do you expect Wines to produce, and how many cases of fortified wines do you expect Ports to produce?
b. Based on your calculations in part (a), how much profit will Wines and Ports report?
c. 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.
d. Explain why your answers in part (a) and (c) are the same or different.
e. 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?
Case Study 2: Phonetex
Phonetex is a medium-size manufacturer of telephone sets and switching equipment. Its primary business is government contracts, especially defense contracts, which are very profitable. The company has two plants: Southern and Westbury. The larger plant, Southern, is running at capacity producing a phone system for a new missile installation. Existing government contracts will require Southern to operate at capacity for the next nine months. The missile contract is a firm, fixed-price contract. Part of the contract specifies that 3,000 phones will be produced to meet government specifications. The price paid per phone is $300.
The second Phonetex plant, Westbury, is a small, old facility acquired two years ago to produce residential phone systems. Phonetex feared that defense work was cyclical, so to stabilize earnings, a line of residential systems was developed at the small plant. In the event that defense work deteriorated, the excess capacity at Southern could be used to produce residential systems. However, just the opposite has happened. The current recession has temporarily depressed the residential business. Although Westbury is losing money ($10,000 per month), top management considers this an investment. Westbury has developed a line of systems that are reasonably well received. Part of its workforce has already been laid off. It has a very good workforce remaining, with many specialized and competent supervisors, engineers, and skilled craftspeople. Another 20 percent of Westbury's workforce could be cut without affecting output. Current operations are meeting the reduced demand. If demand does not increase in the next three months, this 20 percent will have to be cut.
The plant manager at Westbury has tried to convince top management to shift the missile contract phones over to his plant. Even though his total cost to manufacture the phones is higher than at Southern, he argues that this will free up some excess capacity at Southern to add more government work. The unit cost data for the 3,000 phones are as follows:
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Southern
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Westbury
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Direct labor cost
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$ 70
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$ 95
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Direct materials cost
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40
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55
|
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Variable factory overhead!
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35
|
45
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Fixed factory overhead!
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40
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80
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General burdeni
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10
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20
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Total unit cost
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$195
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$295
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Westbury cannot do other government work, because it does not have the required security clearances. But Westbury can do the work involving the 3,000 phones. And it can complete this project in three months. "Besides," Westbury's manager argues, "my labor costs are not going to be $95 per phone. We are committed to maintaining employment at Westbury at least for the next three months. I can utilize most of my existing people who have slack. I will have to hire back about 20 production workers I laid off. For the three months, we are talking about $120,000 of additional direct labor."
Phonetex is considering another defense contract with an expected price of $1.1 million and an expected profit of $85,000. The work would have to be completed over the next three months, but Southern does not have the capacity to do the work and Westbury does not have the security clearances or capital equipment required by the contract.
Southern's manager says it isn't fair to make him carry Westbury. He points out that Westbury's variable cost, ignoring labor, is 33 percent greater than Southern's variable costs. Southern's manager also argues, "Adding another government contract will not replace the profit that we will be forgoing if Westbury does the telephone manufacturing. See my schedule."
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Profits from Southern ($300 - 195)3,000
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$ 315,000
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Less: Profits from Westbury ($300 - 295)3,000
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(15.000)
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Forgone profits
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$ 300,000
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Profit in the next best government contract
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|
|
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Expected price
|
|
$1,100,000
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Less:
|
|
|
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Direct labor
|
260,000
|
|
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Direct material
|
435,000
|
|
|
Variable overhead
|
130,000
|
|
|
Fixed factory overhead
|
150,000
|
|
|
General burden
|
40
|
1,015,000
|
|
Expected profit
|
|
$ 85,000
|
Required:
Top management has reviewed the Southern manager's data and believes his cost estimates on the new contract to be accurate. Should Phonetex shift the 3,000 phones to Westbury and take the new contract or not? Prepare an analysis supporting your conclusions.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.