A personal concern George has is that he

maintain a proper balance of wine products so that

he will be well positioned to expand his marketing

capabilities when he moves to the winery and makes

it his full$-$time job. Thus, in his mind it is important

to ensure that the number of bottles of Petite Sirah

sold each year falls in the range between $40\%$ and

$70\%$ of the overall number of bottles sold.

Questions

I. George needs help to decide how many grapes

to buy, how much money to spend on adver$-$

tising, how many bottles of wine to sell, and

how much profit he can expect to earn over

the two$-$year period. Develop and then solve a

spreadsheet LP model to help him. Then use this

model to answer the following questions.

After showing the business plan to the Bank

of Sonoma, George learns that the loan officer

is concerned about the market prices used in

estimating the profits$-$recently it has been fore$-$

casted that Chile and Australia will be flooding

the market with high$-$quality, low$-$priced white

wines over the next couple of years. In particu$-$

lar, the loan officer estimates that the price used

for the Sauvignon Blanc in the second year is

highly speculative and realistically might be only

half the price George calculated. Thus, the bank

is nervous about lending the money because

of the big effect such a decrease in price might

have on estimated profits. What do you think?

Another comment the loan officer of the Bank

of Sonoma has after reviewing the business plan

is: "I see that you do have an allowance in your

calculations for the carryover of inventory of

unsold wine from the first year to the second

year, but you do not have any cost associated

with this. All companies must charge something

for holding inventory, so you should redo your

plans to allow for this." If the holding charges

are $$0\mathrm{.}10$ per bottle per year, how much, if any.

does George's plan change?

The president of the local grape growers'

association mentions to George that there is

likely to be a strike soon over the unionization of

the grape workers. $($Currently they are not rep$-$

resented by any union.$)$ This means that the costs

of the grapes might go up by anywhere from $50\%$

to $100\%.$ How might this affect George's plan?

Before taking his business plan to the bank,

George had it reviewed by a colleague at the

accounting firm where he works. Although his

friend was excited about the plan and its pros$-$

pects, he was dismayed to learn that George had

not used present value in determining his profit.

"George, you are an accountant and must know

that money has a time value; and although you are

only doing a two$-$year planning problem, it still is

important to calculate the present value profit."

George replies, "Yes, I know all about present

value. For big investments over long time periods,

it is important to consider. But in this case, for a

small investment and only a two$-$year time period,

it really doesn't matter." Who is correct, George

or his colleague! Why? Use an $8\%$ discount fac$-$

tor in answering this question. Does the answer

change if a $6\%$ or $10\%$ discount rate is used? Use

a spreadsheet to determine the coefficients of the

objective function for the different discount rates.

Note: new price will be used for Question $2$ only,

and holding cost will be considered for Question

$3$ only.

${?}^{15}$ This case was contributed by William D$.$ Whisler, California State

University. Hayward.