Question

Cost Volume Profit (CVP)
1. Professor O’Brien realized his dream and opened O’Brien Vineyards. At this point, he only produces a Pinot Noir but hopes to add a new wine next year. Since he has been focused on wine making, he has not been able to keep up with the managerial accounting responsibilities. Can you help him? Here is the info you’ll need:
O’Brien Vineyards contribution format income statement for September.
Sales
504,000
Variable Expenses
215,525
Fixed Expenses
91,250
Net Operating Income
197,225
O’Brien Vineyards has no beginning or ending inventories. The company produced and sold 21,000 bottles last month. Price per bottle is $24.00.

l. Marketing Manager Corbin O’Brien is encouraging me to advertise aggressively. He believes if we advertise on the Food Network during the holiday season, we would increase sales by 12%. Cost would be $27,000. Is this something I should consider? Please show your calculations to support your recommendation. If your decision goes against the numbers indicate why.
M. Production Manager Brant O’Brien believes I should use better quality grapes to make my wine. In doing so, variable cost would increase by $2.00 per bottle. Sales in bottles would increase by 385. Is this something I should consider? Please show your calculations to support your recommendation. If your decision goes against the numbers indicate why.
N. O’Brien Vineyards has the opportunity to sell 150 cases (1,800 bottles) to Wegmans without disturbing sales to our regular customers or fixed expenses. What price should Sales Manager Heather Kelly quote Wegmans so that O’Brien Vineyards increases profits by $7,200.

Answer 1

1.Profit will be as follows:

Increased Sales 504,000*12%	60,480
Increased Variable Costs 215,525*12%	25,863
Increased Contribution Margin	34,617
Less: Costs	27,000
Additional Operating Income	7,617

Since there is additional profit, advertising should be done.

2.Evaluation:

Increase in Sales 385*24	9,240
Less: Variable Cost 215,525*385/21,000	3,951
Increase in Variable Cost for all the bottles 21,385*2	42,770
Increase/(Decrease) in Income	(37,481)

Since it would reduce the overall income, better quality grapes should not be used.

3.Desired Profits = $7,200

Fixed Costs –

Variable Costs 215,525*1,800/21,000 = $18,474

Desired Sales = $25,674

Selling price per bottle = $14.26