Lindsey Adelman ?Booker Jones? Case Setting/Background: 1961, rural Kentucky National beverage=bourbon (VP of US) Long family tradition Iron-free spring water in distillation process, used specially prepared fire-charred white oak barrels (hold 50 gallons) during aging process 1.5% market share in 1960 Notes: 1/5 gallon bourbon whiskey=$5.00 Reported loss=$407,000 for 1961 ?=How should results be presented to bank? Need $1.5 million loan from bank to finance expansion in production Controversy=acct treatment of items reported in ?other operating costs? on IS Need additional cash immediately to remain solvent Marketed one distinctive product (high quality & price), stressed uniqueness of spring water and barrels Good brand image built (full-bodied mellowness, camaraderie, old-fashioned, backwoods quality) No attempt to gain market share made until 1960 Inc. production from 43,000 barrels (1960) to 63,000 barrels (1961) Aged 4 years Straight bourbon whiskey consumption had increased from 15% to 50% of all whiskey consumption Process: mashing(fermenting(distilling(aging Mashing Grind corn, rye, barley malt (corm much higher than required 51%) Cooked in steal tub w/ spring water Mash is cooled Fermenting Mash pumped to cypress wood fermenting mat Yeast is added Bubbling stops 72-120 hours Distilling Mash pumped into still Steam separates it from alcohol & water Steam @ bottom forces alcohol up through sieve holes Distills fermented mash many times Separated alcohol vapors rise to top & turn into liquid (low wine) Redistilled in a doubler (high wine) Residue settles at bottom (stillage converted to animal feed supplement) Aging (legally required) Aged in new charred, white oak barrels 4 years Filled barrels placed in open ricks in rack house Rotated & sampled every 6 months Checked for leaks, seepage Volume declines substantially (get about 35 gallons) Cost before aging=$0.52/gallon Volume=43,000 barrels Barrel manufactured=$31.50/barrel (not reusable) Used barrels sold for $0.50 each (salvage value) Inc. production in 1961=leasing of additional warehouse space=$100,000/year Federal excise tax=$10.50/gallon 1960 & 1961 sales=1,500,000 gallons (=43,000 barrels) Finished goods inventory=175,000 gallons Case: Shown annual profits since 1948 Net sales=$21 million, same as last year yet loss incurred this year Increased production by 50% this year, costs proportionately went up Inc. in inventory account by half million dollars Admin & general expenses up Labor costs up Occupancy costs (build. deprec., rent, heat, light, power, maintenance labor & supplies, real estate taxes, insurance) up Warehousing costs up (store 252,000 barrels instead of 172,000)
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