Part 1: Whitney Vineyard's Original Plan

Over the past five years, Whitney Vineyard has spent $1,500,000 to purchase land and to prepare it for planting grape vines and $20,000 to plant grapes on that property.  It also spent $1,200,000 on a building and equipment to process the grapes and make it into wine.  The vines are now established and Whitney Vineyard is preparing for its first year marketing its wine.

The company plans to sell its wine for $60 per case.  It will cost $3.40 in materials (e.g., bottles, corks, packing materials, etc.) and $1.25 in labor to produce each case.

When it launches its new brand of wine on the market, it plans to run an advertising campaign at a cost of $50,000. It also plans to send a marketing kit to each of the 3,000 retailers in its target market. The marketing kits will cost $45.00 each. The company plans to hire two sales representative at a salary of $65,000 per year plus a 4% commission.  Its utilities will be $4,000 per month, and its administrative and clerical expenses are budgeted at $80,000 per year.

1. What are the relevant annual fixed costs? 

2. What are the variable costs per unit?

3. What are the total sunk costs?

Part 2: Whitney Vineyard's Updated Plan

After careful consideration, Whitney Vineyard has reevaluated its plan for the launch of its wine. Based on the updated plan, annual fixed costs are expected to be $3.5M and variable costs are expected to be $7.65 per case.  The company has also decided to charge $65.00 per case and expects to sell 150,000 cases.

4. What is the unit contribution for a case of Whitney Vineyard wine?

5. What is the contribution margin ratio for Whitney Vineyard?

6. What is the projected total contribution margin for Whitney Vineyard?

7. What is the expected sales revenue for Whitney Vineyard? 

8. What is Whitney Vineyard's expected profit for the first year?

Part 3: Whitney Vineyard's Breakeven

After looking over the projected first year profit, Whitney Vineyard reviewed its updated plan and made a number of adjustments.  Under the updated plan, annual fixed costs are expected to be $3.8M and variable costs are expected to be $8.25 per case.  The company also decided to charge $85.00 per case.

9. What is Whitney Vineyard's breakeven in cases?

10. What is Whitney Vineyard's breakeven in dollars?

Part 4: Whitney Vineyard Moving Forward

When Whitney Vineyard launched its product, it focused its marketing efforts on New Haven County.  During its first year on the market, Whitney Vineyard successfully sold 60,000 12-bottle cases for $5,100,000.  During its second year on the market, Whitney Vineyard followed the same marketing strategy and increased its sales.  Sales and market data for those two years are summarized below.  

11. What was the percentage change in sales between the first year and second year?

12. What was Whitney Vineyard's unit market share during its first year?

13. What was Whitney Vineyard's revenue market share during its first year?

14. Based on a comparison of Whitney Vineyard's unit market share and its revenue market share, what can you conclude about its price relative to competition? That is, were they priced higher than the market average, at the market average, or below market average?  Explain your rationale. 

15. What was the percentage change in Whitney Vineyard's revenue market share between its first year on the market and its second year of the market?

16. What was the change in Whitney Vineyard's revenue market share in percentage points between its first year on the market and its second year on the market?

17. What was the value of one share point (in manufacturer dollars) in Whitney Vineyard's target market during its first year in the market?

18. Compare the percentage change in Whitney Vineyard's sales between its first year and second year on the market (from Question 11) and the percentage change in Whitney Vineyard's revenue market share between its first year on the market and its second year of the market (from Question 15).  What does this comparison indicate about the market and Whitney Vineyard's competitive position in the market?

19. At the end of its second year on the market (when its annual sales were $5,525,000), Whitney Vineyard expected its annual sales to increase by 8.5% per year for the next three years.  Based on this estimate, what would its annual sales be at the end of that period? 

20. At the end of its second year on the market, Whitney Vineyard decided to reevaluate its advertising budget.  It learned a leading competitor had spent $25M that year to reach 85% of the national market.  How much would Whitney Vineyard have to spend in its target market to match the competitor's level of spending?