Carnevale Winery Case – Financial Assignments | Online Homework Help

Determine all the appropriate ratios for Carnevale. Then examine how they have changed and related to both the previous year and the industry means. What problems for the firm does this examination and analyze point to for the firm in trying to deal with its shrinking profit margin? What would you suggest the firm do in order to address this issue. Make sure that your recommendation(s) relate back to the problem(s) that you identified

1. Benchmarks – Determination of the benchmark ratios for this firm

2. Analysis – The analysis of what the change in the various benchmarks means for the business exhibits good critical thinking and logical outcomes.

3. Recommendation – A clear, actionable recommendation is proposed and the justification for its choice is well–supported through the examination and analysis of the benchmark ratios for the firm.

Carnevale Winery
Part 1
Philip Carnevale and his wife Brenda started their winery over 12 years ago. It has grown
from a small winery that rented everything in order to make a few barrels of wine for the couple
and some of their friends to a true winery with a small plot of grapes (less than 2 acres) and a
tasting room open five days a week. The bulk of the wine is still made with grapes purchased
from growers in the area, but Philip has developed a good relationship with them and gets some
very high quality produce to use in making his wine.
The winery produces over 10,000 cases of wine a year now and total sales are over $4
million a year. The vast majority of the wine, 85%, is sold through distributors throughout the
country with whom the winery has established relationships. These distributors are shipped the
wine with invoices that are due 30 days after shipment. Carnevale wines are considered to be a
good value as the wine is rated highly by wine review magazines and wins a number of awards at
industry tastings.
Current Situation
Philip and Brenda knew that the last year had been a bit difficult in the industry overall.
Some areas of the country had been hit with bad weather right at harvest time, including theirs.
This weather problem drove up the price of grapes somewhat, but Carnevale had been fortunate
that about 50% of the grapes that it bought were under contract so the price hadn’t hurt it as
much as it had some of the other smaller wineries. Unfortunately for Carnevale, the majority of
those contracts were coming up for renewal and Philip knew that the vineyards were going to
need to try to cover some of their losses. Luckily, total sales in the wine industry were still going
up in both the premium category, which is what Carnevale is considered, and the value wine
category.
It was early in January and Philip and Brenda were getting started on planning for the next
year. Brenda took care of the financial aspects of the family winery and ran the tasting room,
while Philip did the day to day running of the winery, making the wine, tending to the grape
vines, and maintaining the relationships with the growers. Philip asked Brenda how the last year
had ended up for the winery and whether she saw any problems they might be facing in the new
year. She replied that she was just sitting down to work on the financial information now. She
did tell Philip that the profits for the year were definitely down from the previous year as a
percentage of sales based on the income statement that she had run.
Doing the Ratios
The first thing Brenda needed to do was to see how last year’s financial ratios compared the
financial ratios from two years ago and to the industry averages. She recognized the industry
averages included the larger wineries, but there were so many small wineries included in those
averages she felt that it did provide a good benchmark for comparing Carnevale’s performance.
After that task was complete she and Philip would sit down together and go over them to see
what had changed and see what they could do to improve the performance for the upcoming
year.
Once she had a good idea of where the winery stood compared to other firms financially,
Brenda and Philip were going to have to seriously consider whether they needed to raise the
prices for the wines. They had not increased prices for about three years, which may be part of
the reason Carnevale wine is considered such a good value in the marketplace.
Carnevale Winery Income Statement
For the Period Jan. 1, 20XX to Dec. 31, 20XX
Net Sales Revenue $4,107,000
Cost of Goods Sold
Beginning Inventory $457,665
+ Cost of Goods Produced $2,196,535
Goods Available for Sale $2,654,200
– Ending Inventory $471,250
Cost of Goods Sold $2,182,950
Gross Profit $1,924,050
Operating Expenses
Utilities $49,700
Marketing $407,900
Insurance $99,500
Depreciation $182,000
Salaries and Benefits $389,780
E-Commerce $62,760
Repairs and Maintenance $72,575
Travel $58,750
Supplies $51,950
Misc. Expenses $56,420
Total Operating Expenses $1,431,335
Other Expenses
Interest Expenses $224,300
Total Other Expenses $224,300
Total Expenses $1,655,635
Net Income $268,415
Carnevale Winery
Balance Sheet as of Dec. 31, 20XX
Current Assets Current Liabilities
Cash $124,987 Accounts Payable $197,865
Accounts Receivable $429,870 Notes Payable $201,500
Inventory $471,250 Line of Credit Payable $75,000
Supplies $4,330 Accrued Wages Payable $32,750
Prepaid Expenses $2,100 Accrued Interest Payable $19,000
Total Current Assets $1,032,537 Accrued Taxes Payable $32,000
Fixed Assets Total Current Liabilities $558,115
Land $302,560
Buildings, net $170,800 Long-Term Liabilities
Vehicles, net $98,000 Mortgage $376,800
Equipment, net $237,490 Loan $197,600
Furniture and Fixtures, net $29,780 Total Long-Term Liabilities $574,400
Total Fixed Assets $838,630
Owner’s Equity
Capital and retained earnings $738,652
Total Assets $1,871,167 Total Liabilities and Owner’s Equity $1,871,167
Carnevale Ratios
Two Years
Ago
Industry
Mean
Liquidity Ratios
Current Ratio 1.90 2.00
Quick Ratio 0.98 1.05
Leverage Ratios
Debt Ratio 0.64 0.70
Debt to Net Worth Ratio 1.60 1.70
Times Interest Earned (TIE) Ratio 2.90 2.40
Operating Ratios
Avg. Inventory Turnover 5.10 4.90
Avg. Collection Period (Days) 34.60 33.10
Avg. Payable Period (Days) 31.20 32.50
Net Sales to Total Assets 2.50 2.10
Profitability Ratios
Gross Margin (GM) 50% 49%
Net Profit Margin (NPM) 10% 10%
Net Profit on Assets 21% 20%
Return on Equity (ROE) 39% 25%