Kilgors Case study Investment in a new wine variety


Management Accounting and Business


management report

Executive summary

Wine is a regularly consumer commodity in the daily life of people. This traditional product not only satisfies one of the most people essential needs – ‘drinking’, but also satisfies the higher demand for spiritual values. As people’s living standards increase over times, people demand higher in the quality of wine,  wine varieties therefore becomes plentiful and diversity accordingly. The demand however is not the same for all, but varies from country to country. To illustrate, although Chardonnay wine has been selling well, but after the period 1980-1990s, then its sales were reduced gravity. Instead, Pinot Grigio has been gaining market share of Chardonnay. Therefore, the company has launched a new product – Champagne with the ingredient is combinations of the available materials are Chardonnay and Pinot Noir grapes.

In this report, Kilgors will base upon customer tastes, required budget and the spreadsheet of 2015 to reset the objectives for 2016 to see if their financial position is strong enough to invest in a new wine variety for Chinese market. In order to enter China successfully, Kilgors will also identify what factors they should consider to select an appropriate budgeting approach for expanding to China.

Kilgors has composed their expected 2016 profit with some changes in products, revenue and expenses, and assets and liabilities, which can benefit Kilgors management considering helpful factors for the proposed R&D investment. Hence, a suitable budget approach will help the company effectively transmit the objectives and strategies which are directed to workers, better coordination of business activities and see whether they have achieved the goal or not. Overall, using rolling budgets can helps Kilgorsremove the uncertainties of a long term budget planning.


Kilgors started as a small winery in 1995, and then expanded to other businesses (hospitality and show business). In 2006, their shares are finally listed on the stock exchange. While doing business, Kilgors realizes that Chinese is a very potential market due to increased demand for high-end wine. Kilgors therefore are considering investing in a new wine blend for Chinese customers. This report is divided into two parts: profit planning and budgeting. In the first part, outcomes and details of the profit planning for 2016 will be discussed, while second part will be analysis of how budgeting would benefit Kilgors, factors should be concerned when doing budgeting, and what budget approach Kilgors should use.

Profit planning

Brief description of the profit planning outcomes

Forecasted Result
Free Cash Flow $10,000,000 $29,505,422
Return on Assets > 10% 10.55%
Net Profit Margin > 2% 6.88%
Asset Turnover > 50% 153.21%

In the case of Kilgors, because of the changes in demand we have to drop down the production line for Chardonnay and concentrate on Pinot Grigio. This will cause some effects on the financial performance and the outcomes of our profit planning for Kilgors are as follows:

To achieve a ROA ratio above 10%, total assets must be reduced or net profit must be increased. However, as out strategy is product differentiation, we will invest more on both current and non-current assets. We can only maximise our profit to raise the ratio. Due to buying materials in bulk (fertilizer, bottles, etc), we will get 5% discount on costs of goods sold. In addition, we only increase expenses for Champagne and Pinot Grigio and maintain the same or decrease for the rest. As a result, we will achieve a net profit of $27,981,767 (increase by 194.5%).

  • Return on assets is forecasted to be 10.55% (higher than the objective by 0.55%)

In order to maximize FCF, Net profit should be high and Working capital should be low. To be specific, we have Current assets increase by 14.8% and Current liabilities increase by 39%. As stated previously, we will invest in current assets and will take higher risk to borrow more current debts. Although both increase but the change in current liabilities is higher than in current assets, the net change will be a fall in working capital. Overall, FCF will grow more than expectation.

  • Free cash flow is planned to be $29,505,422 (higher than the objective by $19,505,422).

As mentioned above, net profit increases by 194.5% and Sales increases by 16.2%. The change of net profit is much higher than the change in sales, thus net profit margin will definitely be above the target.

  • Net profit Margin is calculated as 6.88% (higher than objective by 4.88%).

Also for this ratio, sales increase by 16.2% and Total assets increase by 21.2%. Although we reduce current assets, we invest in non-current assets for long-term profitability. Consequently, asset turnover increases since thesales increase significantly. A high sale is achieved largely from selling Pinot Grigio, plus increase labels which are necessary and deduct which are not.

  • Asset turnover is projected as 153.21% (higher than objective by 103.21%).

Comments on the profit planning details

  • Overall, Kilgors absolutely achieves the profit objectives for 2016.

Kilgors Case study Investment in a new wine varietyProducts

Champagne has the highest sales revenue but cannot generate the highest profit due to its enormous expenditure on grapes that are the same with ones used to make Chardonnay. Plus, Chardonnay has lost its popularity recently, which leads to a huge loss in 2015. Therefore, Kilgors would rather invest one more label in the Champagne variety than keep promoting Chardonnay. Additionally, Pinot Grigio fame has boosted recently despite its huge loss in 2015, so Kilgors should take advantage of its increasing demand to urge the investment of one more label in this variety for better yield.

Revenue and Expenses

Pinot Grigio sales grow at the rate of 30% due to enhancing customer preferences towards it, Champagne sales follow at the growth rate of 11% thanks to Kilgors further investment, and the growth rate of the rest increases by 2% because of high likeliness of customer royalties. Together with the rising revenues, expenditure also shows an upward trend since Kilgors expenditures on selling costs, marketing, administration, corporate allocations, cost of free wine and shipping/warehousing/o.prochas to increase to approach a wider range of customers, especially when there are launches of two new labels from Champagne and Chardonnay. Therefore, revenue and expense figures show the huge rises together.

Assets and Liabilities

  Pinot Noir Shiraz Champagne Pinot Grigio Riesling
Selling price per bottle $ 18.33 $ 13.33 $ 35.00 $ 8.00 $ 13.33

Increases in the budgeted sales cause high probabilities that current assets such as cash inventories and receivables rise with quite the same proportion. Additionally, on the side of current assets Kilgors current winery equipment cessation and its wish of a new bottling system application stimulate the huge financing in the non-current asset, property plant and equipment. Thus, Kilgors has to borrow more so that they can have enough financial support to adapt the plan. As a result, total assets and total liabilities grow at the same time.


Budgeting benefits

Being effective in budgeting would benefit Kilgors a lot. First of all, with efficient budget Kilgors can properly communicate the goals and organizational strategies to employees, especially department managers who are then in charge of allocating and efficiently using resources to meet the budgeted goals. Once managers know what goals are, they will be motivated to make appropriate estimates for the purposes of meeting expectations and budgeted numbers. Given an accurate budget, Kilgors is able to provide a clear guideline that allows them to better coordinate the operating activities, too. Additionally, Kilgors can also use budget as a tool to assess employee performance, by comparing the budgeted sales to the actually one, managers can see whether they are on track to meet the goals.

The first factor Kilgors should consider about probably customer tastes. For example, in the background information it is saying Chardonnay was very popular in 1980-1990s but not recently, so when making sales projection for Chardonnay the volume should be lower, hence lower cash needed, Kilgors therefore can have more money to invest in the new wine variety. Besides, different wine may have different maturation period, the wine making process could happen years before the wine actually launched, so it is important to effective forecasting what the demand of Chinese market will be in future. And finally Kilgors also has to identify cash needed for all possible R&D expenses to come up with a new wine variety.

Budgeting approach recommendation

Kilgors should take rolling budgeting for proposed R&D investment mainly because of two reasons. First, in wine market, customer preferences is considered important, which change over times, so Kilgors should have a lot of budgeting plans to work back from the demand (preferences). And rolling budgeting is therefore suitable, because it is a budget that is prepared frequently, updated every few months (Myers 2001). Second, even though China is a potentially lucrative market for Kilgors to step in, it is also known as a volatile market in which businesses would face many changes in the economy and thus one annual budget is not enough (Petroff 2016). Because it cannot give Kilgors up-to-date information to make quick decisions whether to remain or make changes in costs and inventory levels. Implementing rolling budgets however enables Kilgors managers to see the most current information in order to respond quickly to the changes in customer preferences as well as the Chinese economy (Myers 2001).Therefore, with rolling budgets Kilgors can remove the uncertainties of a long term budget planning (traditional budgeting), since the degree of uncertainty is a lot smaller in short term planning hence more accurate budget for Kilgors (Kaplan Finacial 2016). The downside of it is that it is costly and time consuming to recalculate the budget every month (Kaplan Finacial 2016). Moreover, the budgets that change constantly cause confusion for managers as to which numbers/goals are to achieve (Kaplan Finacial 2016).


Based on the case, Kilgors intends to produce a new wine and expand into the Chinese market as well as considerations of consumer tastes; the company should find an appropriate strategy to enable them to deal with the problems and can survive in the more competitive markets. Therefore, by applying appropriate budget – rolling budget, company can quickly response and do an adjustment suitable for their situation in which long term budget cannot solve.