Santos Winery Harvard Case Solution & Analysis

Santos Winery Case Solution


Santos winery is a small family own business, located in California’s Napa Valley, started by Michael Santos. The company enjoys a reputation for producing the small amount of quality wines. There are over 500 wine producers and blenders in Napa Valley region, worth over 9 million cases of wine which are produced and sold annually. Santos winery has the market share of 0.04% as it produces and sold 4000 cases annually. Santos winery produces three types of wines, Cabernet Sauvignon, Cabernet and the red table wine. The profit margin for Santos winery is 2014 has decreased from the profit margin of 2013 from 14% to 11.1%.

Problem Statement:

Even after the increase in sales in 2014 the profit margin of the winery has decreased from 14% in 2013 to 11.1% in 2014 due to which the owner of Santos Winery, Alberto Santos is concerned and would like to evaluate the factors made the difference.
Variable and Fixed Cost:
Variable costs are the costs that vary depending on the production volume of the company, variable cost rises as the production increases and falls when the production decreases. The variable cost of Santos Winery includes the grapes that are required to make the wine; the variable cost for both types of grapes in 2014 is $85,500 and $38,500.
The wooden barrels required for the fermentation process of the Cabernet Sauvignon grapes and the holding tank that is required for the fermentation of generic red grapes are also the variable cost for the winery. The bottling cost of all three types of wines is also the variable cost for the winery because the increase in production will increase the cost.
The direct labor cost of the Harvesting of grapes is also the variable cost for the company which is $9 per hour. The crush labor cost is also the variable cost for the winery which is paid $10 per hour.
The overhead expenses which include the admin rent and office expense are the fixed cost for the winery, the depreciation expenses is also a fixed cost for the winery.
The indirect materials which are part of wine making process which involves yeast and other additives into the wine to help the fermentation process and to help balance the flavors in the wine are also the variable cost for the winery as it increases with the production of the winery.
Lab expenses for the company are the fixed cost; the expenses are incurred for the lab supplies and equipment. The lab is used by the production supervisor and the wine master to test the grapes and wine at various stages of production.
The liquor taxes for the Santos winery which are required to pay for every bottle of wine sold are also the variable expense for the Santos winery.
The production office Santos pays a part-time employee to help administer the production function which is also the fixed cost which amounts to $12000 annually. The sales related cost of $30,000 per year paid on the contract basis to sell the Santos wines is also the fixed cost of the winery. However, the amount paid to the distributors for each unit sold is the variable cost for the winery...................

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