FreemarkWinery_Group7_sec A_Assignment 1.docx

7/27/2019 FreemarkWinery_Group7_sec A_Assignment 1.docx

1/5


2/5

Introduction

This case analysis encircles the problem faced by William Jaeger, partner of Freemark

Abbey Winery. To produce quality grapes, the grapes need to be harvested when they have

acquired proper sugar and acidity levels. Due to approaching storm, William is forced to evaluatethe future options so that he can arrive at the right decision about harvesting the grapes. Here

various alternatives are evaluated using Decision tree with an objective of maximization of

expected value and arrived at an optimal decision.

Back Ground

Freemark Abbey was located in Napa Valley, California. The winery produced only

premium wines from the best grape varieties. Each year about 1000 cases of Riesling wine were

bottled. (1 case = 12 bottles) Several different styles of Riesling wine are available in market. A

rare style results when almost-ripe Riesling is attacked by the botrytis mold. The resulting wine

is extraordinary.

Now William is left with two alternatives,

Harvest before storm Wait for storm

If harvested before storm, the wine yielded is sold at wholesale price of $2.85 per bottle.

From the weather reports, Jaeger concluded that there was a fifty-fifty chance that the rainstorm

would hit the Napa Valley. Also he thought that there was a 40% chance that, if the storm did

strike, it would lead to the development of botrytis mold and the wholesale price of resulting

wine would be $8 per bottle, but there is 30% reduction in total juice produced. If botrytis did not

form, this would yield thin wine which can be sold at wholesale price of $2 per bottle. If Jaeger

decide not to harvest the grapes immediately in anticipation of the storm and storm did not strike,tree possibilities are there 1) with luck, the grapes would result in a good wine selling for around

$3.50 per bottle in wholesale with aprobability of 0.4 2) grapes would yield a light wine selling

at $3 per bottle wholesale with a probability of 0.4 and 3) dip in acidity that would produce a

low acid wine that would be priced at $2.50 with aprobability of 0.2. The estimation part is as

follows.


3/5

Decision Tree

Considering the option of bottling and selling the wine wholesale

Mold $8/bottle

0.4

Storm 0.6

0.5 No Mold$2/bottle

Good wine $3.50/b

Wait

0.5 0.4

No Storm 0.4 Light wine $3.00/b

Harvest 0.2

Acid dip $2.50/b

$2.85/bottle

Calculation

All the estimates are done, considering 1000 cases of Riesling wine are bottled

Considering the option of bottling and selling the wine wholesale

If harvested before storm,

Wholesale price = $2.85/bottle

Therefore, revenue expected = $2.85*1000*12 =

If decided not to harvest immediately, storm strikes, botrytis mold developed,

Probability = 0.4

As there is 30% reduction in total wine produced, no of cases produced = (1-0.3)*1000= 700

$67,200

$24,000

$4,200

$3,600

$3,000

$34,200

$42,000

$36,000

$30,000

$34,200


4/5

Wholesale price = $8/bottle

Therefore revenue expected = $8*12*700= $67,200

If decided not to harvest immediately, storm strikes, and botrytis mold is not developed,

Probability = 0.6


No of cases = 1000

Therefore expected revenue = $2*12*1000 = $24,000

If decided not to harvest immediately in anticipation of storm and storm did not strike there are

3 possibilities

Possibility 1- with luck, the grapes would result in a good wine

Probability = 0.4

Wholesale price = $3.50/bottle

Therefore revenue expected = $3.50*12*1000 = $42,000

Possibility 2under favorable weather, grapes yield a light wine

Probability = 0.4


Therefore revenue expected = $3*12*1000 = $36,000

Possibility 3 - dip in acidity that would produce a low acid wine

Probability = 0.2

Wholesale price = $2.50

Therefore revenue expected = $2.50*12*1000 = $30,000

Calculation of expected revenue when decided not to harvest immediately,

Probability that storm strikes = 0.5

Probability that storm did not strike = 0.5

Expected revenue when storm strikes = ($67,200*0.4) + ($24,000*0.6)

= $41,280


5/5

Expected revenue when storm did not strike = ($42,000*0.4) + ($36,000*0.4) + ($30,000*0.2)

= $ 37,200

Therefore, expected revenue when decided not to harvest immediately in anticipation of storm

= (0.5*$41,280) + (0.5*$37,200)

Hence William is advised to wait in anticipation of storm, considering the option of wine isbottled and sold wholesale

Considering the option of not bottling the wine that was not up to standards and selling the

wine in bulk/selling grapes directly

This option is applicable only for the condition storm strikes and botrytis mold not formed

Selling price = half of bottling price

Therefore expected revenue = *$24,000

= $12,000

And other possibilities remain the same

Calculation of expected revenue when decided not to harvest immediately,

Probability that storm strikes = 0.5

Probability that storm did not strike = 0.5

Expected revenue when storm strikes = ($67,200*0.4) + ($12,000*0.6)

= $34,080

Expected revenue when storm did not strike = ($42,000*0.4) + ($36,000*0.4) + ($30,000*0.2)

= $ 37,200

Therefore, expected revenue when decided not to harvest immediately in anticipation of storm

= (0.5*$34,080) + (0.5*$37,200)

In this case also William is advised to wait in anticipation of storm, as $35,640>$34,200 considering the option of not bottling the wine that was not up to standards and selling the

wine in bulk/selling grapes directly

Conclusion

Hence the optimal decision to be made by William Jaeger is to wait anticipating storm

$39,420

$35,640

Documents

FreemarkWinery_Group7_sec A_Assignment 1.docx