Management Consulting Case Study-Wine in Boxes

 Introduction

• Our client is the CEO of an Australia-based winemaker that is the market leader in its country.
• Recently, profits have been decreasing, and the CEO believes that this is due to losses in the boxed wine division.

Factors to Consider

• Assessing the profitability of each division
• The types of costs associated with each product
• The pricing and target customer for each product
• The use of the same grapes for both products

Background Information

• The company is currently losing money
• Sales are split evenly between the two divisions
• Bottled wine sells for AUS$5 per unit, Boxed wine sells for AUS$10 per unit
• Bottled wine contains 750ml, Boxed wine contains 3 litres
• Both products have an overhead of AUS$0.50 per unit
• Raw material costs for bottled wine are AUS$2 and AUS$8 for boxed wine
• Packaging costs AUS$1 for both products, while other variables (distribution and labour) are AUS$1 per bottle and AUS$2 per box.

Analysis-

• If the grape cost for bottles is AUS$2, for boxes it is AUS$8 (1:4 ratio)
• Profit for bottles is AUS$1.5; boxes have a loss of AUS$0.5

Conclusion-

• The company should try to source grapes of lower cost for its boxed wine product line.
• The current raw material cost ratio is 1:4 when comparing bottled wine against boxed wine, but the price ratio is only 1:2.
• Boxed wine targets a different market segment and may not require the same quality (and cost) of grapes as bottled wine.
• Lowering the raw material cost for boxed wine could make the line profitable.

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By Vandana Gaur