Decision Analysis

1) Introduction

2) Product profitability analysis: Kay would like to be able to better assign costs to each of AVS’s products, and has collected the following information about AVS activities.

• Harvesting activity – The Chardonnay grapes can be harvested at the average rate of 71.5 pounds/hour, while the generic white grapes are harvested at the rate of 100 pounds/hour. Harvesting includes costs related to tractors and harvest labor.
• Crush activity – Relates to the pounds of grapes crushed. Includes costs of crusher equipment and crush labor.
• Fermenting activities – Barrel costs relate to the Chardonnay wines by the percentage of wine used in each wine type. Holding tanks relate to the Blanc de Blanc and the regular Chardonnay wines by the percentage of wine used in each wine type.
• Lab and supervision activities – Albert estimates that these activities are split 60% Chardonnay-Estate, 25% regular Chardonnay, and 15% Blanc de Blanc.
• Other production activities and costs not directly associated with a specific wine – Allocate according to the number of bottles produced of each wine.
• Administrative activities – Allocate according to sales revenues.

a. Use this information, along with the information given in the case, to construct a product profitability analysis. Assume that AVS did not buy the grapes referred to in Question 2.

b. What would you recommend to Kay Aproveche regarding the product profitability analysis?

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