Crooked Creek Wines operates a cellar door venue in which customers can sample a
ID: 2542847 • Letter: C
Question
Crooked Creek Wines operates a cellar door venue in which customers can sample and purchase wines. The average revenue per day is $750 , variable cost per day is $250 and annual fixed costs for the cellar door operations is $95,000. Assume 365 operating days. What is the operating profit (loss) fo r cellar door operations per year?
As CVP analysis allows us to play “what if” games with the information, calculate the operating profit under each of the following conditions:
a) Reduction in cellar door operations to 280 days per annum
b) Increase in the average daily revenue to $800
c) Increase in the average daily revenue to $800 AND decrease variable costs to $225 AND reduce the operating days to 290.
Once all of the options have been considered, which of the options would you recommend to the management o f Crooked Creek Wines and why?
Explanation / Answer
Answer
per day
Annual (365 days)
Revenue
$750
$273750
(-) variable cost
$250
$91250
Contribution margin
$500
$182500
(-) Fixed cost
$95000
Operating Profit per year
$87500
Alternative ‘a’
per day $
Annual (280 days)
Revenue
750
210000
(-) variable cost
250
70000
Contribution margin
500
$140000
(-) Fixed cost
95000
Operating Profit per year
$45000
Alternative ‘b’
per day $
Annual (365 days)
Revenue
800
292000
(-) variable cost
250
91250
Contribution margin
550
$200750
(-) Fixed cost
95000
Operating Profit per year
$105750
Alternative ‘c’
per day $
Annual (290 days)
Revenue
800
232000
(-) variable cost
225
65250
Contribution margin
575
$166750
(-) Fixed cost
95000
Operating Profit per year
$71750
Final Evaluation for answer
Alternatives
Current
(a)
(b)
(c )
Operating Profit per year
$87500
$45000
$105750
$71750
From above analysis, it is clear that Option ‘b’ should be recommended to increase daily revenue to $800. This is because, of all the options, this option gives maximum Operating profits of $105,750.
per day
Annual (365 days)
Revenue
$750
$273750
(-) variable cost
$250
$91250
Contribution margin
$500
$182500
(-) Fixed cost
$95000
Operating Profit per year
$87500
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