Adam Tran Winery is located in the Niagara area of southern Ontario. Adam Tran started the winery in the early 1970s as a means of using the excess grapes from his vineyard. By experimenting with grapes and processing tech- niques, Adam Tran Winery has been able to produce an increasing number of quality wines. Starting in the early 2000s, the children and grandchildren of Adam Tran were operating and expanding the winery. It was contracting with local vineyards for all grapes used in production. There are 30 varieties of wine that are placed into four Adam Tran groups for production, marketing, and management purposes. The groups are Premium brands, Quality+, Quality, and Popular. The profitability of Adam Tran Winery is shown in Exhibit 1. Each group is managed by a senior vice president, and all told the presi dent that the allocation of excess capacity is unfair. There are complaints that 100% of plant capacity overhead is being allocated to group production costs rather than the capacity being used. This allocation largely refers to the amorti zation of production assets, as noted in Exhibit 1. The winery mainly focused on the long term production and marketing of quality wines. Three years ago, the plant capacity was increased to meet a 20- Exhibit 1 Operating Income (millions of dollars) Sales $951 Cost of goods sold $599 Amortization of production assets 57 Gross profit $295 Selling and administrative expenses $238 Amortization of selling and administrative assets 10 Interest expenses 10 Operating income 1 CASE ADAM TRAN WINERY Exhibit 2 Profitability by Product Group (millions of dollars) Premium Quality+ Quality Popular Total Sales 180 286 200 285 951 Direct materials 18 30 30 50 Direct labour 40 75 40 80 Variable overhead 36 43 30 Fixed overhead 26 27 40 Gross profit 601 60 85 295 Variable S & A 30 23 37 Fixed S & A 201 20 53 Interest expenses 2 2 10 Operating income 8 15 37 year growth plan. That meant once the additional capacity came fully on stream (two years ago), the winery had excess capacity. It is presently operating at 70% of capacity. Its plant operates 24 hours a day for each day of the year. Real growth in sales (after subtracting inflation) has been 4% a year, and that is expected to continue into the future. The board of directors is unhappy with the profitability of the Popular wines group. Exhibit 2 shows the profitability of each group, and the relatively poor performance of the Popular group. Nevertheless, the Popular group is expected to grow faster than the other three groups, and sales and administra- Live capacity was put in place to prepare for that sales growth. A number of the board members want to sell the Popular group. Required Assume that the Popular brand is being charged with 40% more overhead than needed for its level of sales and production and that the excess overhead will be charged to a corporate account. Given this change in overhead allocation, what will be the profitability of the Popular brand?