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Quantitative Techniques III

Assignment 1 Case Analysis of

Freemark Abbey Winery

PGP1 Section A Group 07 Submitted on 19th, March, 2013

Submitted by Harkirat Singh Muraleedharan R Nikhil Sharma O B Vishnu Ruban Rajendra Babu Mellam Tejinder Negi 2012PGP124 2012PGP213 2012PGP226 2012PGP236 2012PGP294 2012PGP403

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 evaluate the 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 a probability 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 a probability of 0.2. The estimation part is as follows.

Decision Tree
Considering the option of bottling and selling the wine wholesale Mold $8/bottle 0.4 Storm 0.5 0.6 No Mold $2/bottle
$24,000

$67,200

Good wine $3.50/b Wait 0.5 No Storm 0.4 0.4 Light wine $3.00/b $36,000 $3,600
$4,200 $42,000

Harvest

0.2 Acid dip $2.50/b


$3,000 $30,000

$2.85/bottle

$34,200

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 = $34,200

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

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 Wholesale price = $2/bottle 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 2 under favorable weather, grapes yield a light wine Probability = 0.4 Wholesale price = $3/bottle 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

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) $39,420 Hence William is advised to wait in anticipation of storm, considering the option of wine is bottled 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) $35,640 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

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