After doing some reading about winery industry, the raw material of ‘Grape’ is one of the variable cost that poses the greatest and most risk.
Obtaining the wine grapes is varied by the quality, contractual agreements, unpredictable supply market and the juice yield.
The grape prices can be lower with bulk buying (not to forget to buy the quality and the grape with most juice yield). This translates to lower variable costs that also bring advantage to the company to generate more cash flow by playing around with the price per bottle sell.
The positive cash flow (sustainable growth) brings significant advantage to the company rather than trying to increase the capacity to 100% in short time of period but end up losing money as the company encounter over stock/ supplies with short demand and need to sell the stock in low prices.
Also, maximizing the capacity for 10years of operation is not healthy, a business need to plan for future growth to accommodate 30,000 gallons, 50,000 gallons or more to stay profitable and expansion.
Below is my proposal of the ideal price per bottle - $9.99 (business strategy to catch consumer’s mind) with a little conservative percentage of 50% of variable cost (considering the higher risk of the raw material threats – grapes/ labor cost/ tax and others miscellaneous expenses).
The following proposal expect positive NPV = +$613k and IRR of 22% ( the higher the IRR , the better the returns relative to cost, and the lower the risk).
Besides, the company need to start planning for expansion by year 6 as the capacity will be fully utilized.
http://www.agribusiness-mgmt.wsu.edu/agbusresearch/docs/wine_grapes/xb0997e.pdf
http://www.extension.agecon.vt.edu/pdf/VWBG%20(May%2014,%202009).pdf
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