Question

The Cost of Producing Wine at Only a Small Fraction of the Price

Most consumer goods are not sold by the manufacturer. Instead, they are produced by the manufacturer, who sells to a wholesaler, who in turn sells to a retailer, who sells to the public. Such is the case with most wine.

There has been an outcry in recent years over increases wine in prices. Although prices have risen sharply, the multilevel market structure and the markup that occurs at the wholesale and retail levels have a much larger role in the price increases than the production of the wine itself. Total production costs for a typical $24 bottle of wine are just $4.92, or about 20.4% of the final price, whereas wholesale and retail markups together make up 40% of the final price. Not surprisingly, raw materials (grapes) are the single biggest cost. The cost of the grapes may be as much as 60% of total production costs but varies greatly from lower-quality inexpensive wines to the highest quality wines. The second-highest cost for many vintners is the barrels used to ferment the wine. French oak barrels cost as much as $700 apiece and last only a few years. The other major production cost, other than the actual physical plant where the winemaking occurs, is time. Quality wines spend 2–2 ½ years aging in barrels and then an additional 8 months in bottles before being ready for sale.

1. How much substitutability do you suppose exists between inputs in winemaking? How might this factor affect efforts to cut costs?
2. If a firm were to find a new technology that cut the required aging time in half, how would it affect the demand for other inputs?

Answer 1

The company used a relatively inferior glue in making shoes to save on the production costs.The second mistake was that the company didn't run an in house test on the effectiveness of the new relatively cheaper glue.

Selling of defective shoes might harm the brand name and potential customers will feel cheated and the customer loyalty would go away. The product is so defective that the glue runs out after 20 hours of running. The benefit of selling the shoes is that they will be able to avoid huge losses in terms of a huge stock of defective shoes.

The company, if destroy shoes will have to suffer heavy losses despite having huge debts which have doubled since last year. If they do not destroy it these shoes will unnecessary waste the warehouse space resource and will further lead to stock warehousing problem sand costs.

The best option is to destroy the defective stock in order to avoid the huge loss of brand loyalty and even may take the company to shut down position, if they decide to sell off these defective shoes.