After finishing her business degree at State University, Laura Martin went to work for her father in
Question:
After finishing her business degree at State University, Laura Martin went to work for her father in the family furniture business. However, she always nurtured the idea of branching out on her own. As an amateur viniculturist, her dream was running her own winery. Recently, she bought 5 acres of land in the hills of Santa Barbara with the option to purchase an additional 50 acres. Initial analysis has shown that the land would be ideal for growing a variety of premium grapes.
Because wine making is capital intensive, and because growing commercial-quality grapes with a full yield of 5 tons per acre takes at least eight years, Laura is planning to start out on a small scale. She plans to plant vines on 4 of the initial 5 acres and tend to the crop on weekends. To help maintain a positive cash flow during the first few years, she plans to buy grapes from other nearby growers so she can make her own label wine. She proposes to market it through a small tasting room that she will build on the land and keep open 011 weekends.
Laura will begin with $10,000 in savings to finance the initial purchase of grapes from which she will make her first batch of wine. She also intends to apply to a local bank for a loan, so she needs to make a business plan calculating the profitability and cash flows associated with her idea. Her preliminary planning horizon is two years. She must decide how much of the $10,000 should be allocated to purchasing grapes for the first and second years. In addition, she must decide how much to spend purchasing Petite Sirah and Sauvignon Blanc grapes.
Laura estimates that in the first year, grapes for Petite Sirah will cost $.80 for each bottle, and those for Sauvignon Blanc will cost $.70 per bottle. In the second year, the costs will change to $.75 and $.85, respectively. Laura has arranged with a local firm to provide, label, and fill the necessary bottles at $.50 each. However, the bottler has limited capacity and can only fill 35,000 bottles each year. She anticipates that the Petite Sirah will sell for $8 per bottle in the first year and $8.25 in the second year, while Sauvignon Blanc will sell for $7 per bottle for each year.
In addition to the decisions about the grape purchase, Laura must estimate the wine sales during the two years. Because Laura lacks the capital for market research, she is wondering about how much money to spend on promoting each wine each year. The winemaking association says that for each dollar spent in the first year promoting Petite Sirah, a demand of five bottles will be created, and that each dollar spent in the second year will result in a demand for six bottles. Similarly, the respective results for Sauvignon Blanc are 8 bottles in the first year and 10 bottles in the second year.
The first-year funds for grape purchases, bottling, and advertising will come from the initial $10,000. Assume that the cash earned from wine sales the first year is available in the second year. Finally, Laura needs a proper balance of wine products, so the number of bottles of Petite Sirah sold each year must be between 40% and 70% of all bottles of wine sold.
Suppose that the number of bottles of Petite Sirah and Sauvignon Blanc sold each year are only four and five for each advertising dollar, respectively. What effect does this have 011 Laura’s plan?
College Algebra Graphs and Models
ISBN: 978-0321845405
5th edition
Authors: Marvin L. Bittinger, Judith A. Beecher, David J. Ellenbogen, Judith A. Penna