Michael Shaps' Winery sells fine wines throughout the province. Michael's distribution strategy is legally restricted to three channels. Last year Michael sold 1,225 cases of wine directly to consumers at his winery. He sold 3,800 cases directly to consumers through his website, despite trade agreements between the provinces which limit to where he can ship. Finally, Michael sold 9,160 cases of wine to the government controlled wholesaler, who then sold it to retail stores and the restaurants, bars and hotels of the hospitality sector. Michael's winery is at capacity and he has never had a year where he didn't sell all of the wine he produced.

Michael sells his wine to the government wholesaler at a 30% markup. The wholesaler expects a 50% markup on wine sold to the retail or hospitality sectors. Retail stores enjoy a further 50% margin on the wine sold to the end consumer. To prevent channel conflict, Michael sells his wine online and at the winery for the same price that other retailers charge.

Michael's production costs for a 12 bottle case of wine total $86.

Question 1          

What price does Michael charge consumers for a bottle (not a case, but a bottle) of wine purchased directly from him at the winery or through his website?

Question 2

What was Michael's total revenue earned from all three distribution channels (wholesalers, online, & winery)in the past year?

Question 3

What was Michael's total gross profit earned from all three distribution channels (wholesalers, online, & winery) in the past year?

Question 4

Michael is considering the purchase of a second vineyard. The second location is a very small 10 acre parcel of land with a 5 acre vineyard planted with grape varieties Michael doesn't use in his wine.

The real value in the site is that it is located on a route well traveled by winery enthusiasts. Purchasing the site would allow him to open an additional winery store. The second vineyard would cost $3,500,000. Construction of the parking lot and winery store would be an additional $750,000.

In the first year, Michael expects sales at the second winery to be 65% of his current winery. As online sales are primarily driven by wine enthusiasts who were introduced to his wine at his winery, Michael expects that his online sales lift will match that of the additional winery store (that is, his new winery will have sales 65% that of the current winery, and online sales will increase by an amount equal to 65% of current online sales).

If Michael purchases the second vineyard, opens the additional store, and meets his projections, what will be the gross profits generated from this second winery?

Question 5

In addition to sales through the second winery and online sales, the new winery will produce grapes Michael can sell to other producers for a total gross profit of $15,000. This is not enough to breakeven on the cost of purchasing the vineyard. How many cases of wine will need to be sold directly to consumers (either online or in the wine store) in addition to the grape sales for the additional winery project to breakeven?