Question

The controller for Canandaigua Vineyards. Inc. has predicted the following costs at various levels of wine output.

Wine Output (.75 Liter Bottles) 10,000 Bottles 15,000 Bottles 20,000 Bottles

Variable production costs .. $37.000 $55.500 $74.000

Fixed procluction costs .. $100.000 $100,000 $100.000

Fixed selling and administrative costs ... $40.000 $40.000 $40,000

Total .. $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.

Wine Sales Sales price per.75 liter bottle

10,000 Bottles: $18.00

15,000 Bottles: $15.00

20,000 Bottles: $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 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 increases?

Answer 1

Part 1
Statement of sales and Unit cost
(A)	Sales level	10000	Bottles	15000	Bottles	20000	Bottles
(B)	Sales Price	$ 18.00	Per Bottle	$ 15.00	Per Bottle	$   12.00	Per Bottle
(AxB)	Sales value	$ 180,000.00		$ 225,000.00		$ 240,000.00
(C )	Variable Production cost	$     37,000.00		$    55,500.00		$    74,000.00
(D)	Fixed Production cost	$ 100,000.00		$ 100,000.00		$ 100,000.00
(E)	Fixed selling and Administrative Cost	$     40,000.00		$    40,000.00		$    40,000.00
F=(C+D+E)	Total cost	$ 177,000.00		$ 195,500.00		$ 214,000.00
(F/A)	Cost per Unit	$ 17.70	Per Bottle	$ 13.03	Per Bottle	$ 10.70	Per Bottle

Part 2
Statement of Profit
(A)	Sales level	10000	Bottles	15000	Bottles	20000	Bottles
(B)	Sales Price	$             18.00	Per Bottle	$            15.00	Per Bottle	$            12.00	Per Bottle
C= (AxB)	Sales value	$ 180,000.00		$ 225,000.00		$ 240,000.00
(D)	Less: Total Cost	177000		195500		214000
(E=C-D)	Profit	$       3,000.00		$    29,500.00		$    26,000.00
Maximum profit is at 15000 Level of Bottles

Part 3
Out of the three output levels best level for the company is 15000 units sales.
Even though the price at 15000 level is lower than 10000 unit level but due to high quantity the profits are more since fixed cost is absorbed in a better way.

Part 4
Unit cost decrease with the level of output increase because fixed remains the same at every level and due to high level of quantity fixed cost per unit reduced.
Fixed cost is absorbed by the number of units produced. When output increase fixed cost remains the same but per unit cost decreases.
When volume increase the demand in the market needs to be equal to demand. To sell a higher quantity in market it is necessary to reduce prices to attract more customers towards the product. Simple law of demand plays its role in this situation. When price increase demand decrease and when price decrease demand increases. Another reason for decrease in price is reduced cost. When quantity is low the manufacturer charges its cost on customers and when quantity increase manufacturer’s cost decrease hence price also decrease.