QUESTION 7 (4 + 2 = 6 marks)

Izzy Dukakiss business Izzy Drinks can pay a lump sum fixed amount of $3,500 to purchase the grape juice from a supplier. Izzy is considering 2 options of business. The first option is to bottle the grape juice and sell them immediately. The second option is to wait two months, let the juice ferment and sell bottled wine. He intends to sell 10,000 bottles of either grape juice or wine.

Option 1 - Grape juice:

To produce 10,000 bottles of grape juice, Izzy estimates that the plastic bottles cost $0.10 each. In addition, each bottle is attached with one label and the labels cost $0.15 each. Besides the lump sum payment to the supplier of grape juice, Izzy estimates additional fixed cost to be $6,000. An estimated selling price to wholesalers is $2 per bottle of grape juice.

Option 2 - Wine:

To produce 10,000 bottles of wine, the business first needs to ferment the juice and then makes the wine. Izzy estimates the cost of fermentation to be $1 per bottle. In addition, the glass bottles cost $0.30 each, and each bottle is attached with one label and the labels cost $0.15 each. Besides the lump sum payment to the supplier of grape juice, Izzy estimates additional fixed cost to be $16,000. An estimated selling price to wholesalers is $4 per bottle of wine.

Required:

Calculate the expected profit (or loss) for both options based on the above information and estimates.

(4 marks)

Answer here:

Profit (or Loss) if only Option 1 is taken:

Profit (or Loss) if only Option 2 is taken:

Required:

If Izzy Drinks takes Option 2 and can sell all 10,000 bottles of wine, what would be the selling price per bottle of wine to make a profit of $8,000?

(2 marks)

Answer here: