preview

Case Analysis Case Study Desert Valley's

Decent Essays

The purpose of this memo is to assess the profitability of the Ferguson Foods opportunity and explain how the deal would impact Desert Valley’s financial statements.

The Ferguson Foods opportunity is profitable in all years from 2016 to 2020 however:

- Contribution margins are steadily decreasing each year as increases in the costs of production (Direct materials, direct labour, transportation costs, and duties/taxes) are outpacing price increases. By 2020, the contribution margin is less than half of what Desert Valley is receiving from its current customer base.
- After Ferguson’s expansion into Oregon and California in 2017, the year-over-year growth rate of sales decreases substantially.
- Sales have been better than expected which is causing Desert Valley to operate at 89% of its production capacity. The brewery is generating a 31% contribution margin on these …show more content…

Fluctuations in foreign exchange rates may have an adverse impact on profitability and cause cash flow to be somewhat unpredictable for budget planning purposes.
- If Ferguson chooses to purchase more product than projected then they can do so at a 15% discount to the standard price at the time. Based on the current price of $34.50, Ferguson would be able to purchase more product at $29.33 per case which is much cheaper than the $31.00 to $33.00 range that they would be paying otherwise. Selling product at this price would yield contribution margins of 11% to 2% which is substantially less than what the brewery is currently generating from its current customers.
- The Ferguson Foods contract would be an easy way for Desert Valley to gain access to the US market. Their customers are in the same target market as Desert Valley so this is a natural fit. That being said, the locations are very spread out across different states which will make it difficult for Desert Valley’s brand awareness efforts to gain

Get Access