The controller for Oneida Vineyards, Inc. has predicted the following costs at various levels of wine output.
Wine Output (.75 Liter Bottles)
|
|
10,000 Bottles
|
15,000 Bottles
|
20,000 Bottles
|
|
Variable production costs .....................................
|
$ 44,400
|
$ 66,600
|
$ 88,800
|
|
Fixed production costs .........................................
|
120,000
|
120,000
|
120,000
|
|
Fixed selling and administrative costs ......................
|
48,000
|
48,000
|
48,000
|
|
Total ..............................................................
|
$212,400
|
$234,600
|
$256,800
|
The company's marketing manager has predicted the following prices for the firm's fine wines at various levels of sales.
Wine Sales
10,000 Bottles 15,000 Bottles 20,000 Bottles
Sales price per .75 liter bottle $21.60 $18.00 $14.40
Required:
1. Calculate the unit cost of wine production at each level of output. At what level of output is the unit cost minimized?
2. Calculate the company's profit at each level of production. Assume that the company will sell all of its output. At what production level is profit maximized?
3. Which of the three output levels is best for the company?
4. Why does the unit cost of wine decrease as the output level increases? Why might the sales price per bottle decline as sales volume increases?