Dessert Valley brewery Harvard Case Solution & Analysis

Dessert Valley brewery Case Study Solution

Hydroponic department has been producing the malting barley. It has been selling malting barley to three different customers; one sales to brewery, second to external customers, and third for the livestock feeds. The variable costs for the brewery and external customers is same $2.10 per kilogram (Kg), but the variable costs for the livestock is $0.23 per Kg. The variables costs might vary as economies of scale.

The hydroponic department has projected increased production of malting barley for the year 2015, but no significant changes are observed in the variable costs of malting barley because, the company has a total production of 1.86 million kg barley which is supposed to increase to 2.89 million kg. The overall production has increased by 28% with respect to actual. See Exhibit 1

Furthermore, the fixed price of the production has decreased by 5%, which shows increased efficiency of the company to control costs. On the other hand, selling price for the malting barley to brewery is $2.20 and external customers is $2.89. Similarly, selling price of malting barley for the livestock feed is $0.27. The market price of the malting barley is $2.89, but because it is used within the company it is sold for $2.20 after accounting for the costs incurred over the production.

On the other hand, hydroponic department has fixed costs of $586,551 which have declined by 5% in projections, but variable costs have increased by 4%. Meanwhile, other expenses and interest expense are constant in actual and in projections. So, changes only in the fixed and variables costs have been observed given that other expenses have remained constant. Furthermore, the sales to brewery has increased by 30% and external customers by 54%. See exhibit 1

The variable costs for brewery and external customers are $2.1, and variable costs for the livestock is $0.23. The overall units produced in actual are 1.86 million, and in projections are 2.4 million so increasing production capacity would not affect the fixed costs thus fixed cost per kg of malting barley is $0.30. Accordingly, the transfer price for the brewery and external customer is $2.40, and transfer price for the livestock is $0.53. Transfer costs refer to the costs incurred to produce product after accounting for variable and fixed costs. See Exhibit 2

The full costs transfer price is somehow different from the transfer price because, the transfer price only accounts for variable cost and fixed cost. But, full costs transfer price also accounts for other expenses and interest expenses. So, average variable cost per kg is $1.48, and fixed cost is $0.3 along with the other expenses and interest expenses cost per kg is $0.13 and $0.08 respectively. So, total full costs transfer price before tax is $1.99. Therefore, assuming average variable costs of $1.48, the company incurs $1.99 cost per kg of malting barley. See Exhibit 3

It is recommended for the company that it should increase the production capacity and benefit from the economies of scale.On the other hand, it should focus on costs reduction, and bring efficiency in operations. Meanwhile, economies of scale are very important that should be considered to increase the production capacity as they would reduce the costs incurred over per kg of malting barley......................

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