Korea Rice Wine Company (KRWC) Produces and Sells the Highly

Essay

Korea Rice Wine Company (KRWC) produces and sells the highly popular rice wine in Asia. In the current year,
it will sell 3 million gallons of rice wine in Japan. (One case of rice wine is equivalent to 12 pack/750 ml bottles
or 2.38 gallons.) For many years it has sold in the Japanese market through a Tokyo-based importer. The
contract with the importer is up for renewal and KRWC decides to reconsider its Japanese market strategy.
After much analysis, it decides that three alternatives warrant further consideration:
• Option 1: Renew the contract with the current importer who manages all the marketing and distribution of
rice wine in Japan. KRWC receives a net payment of $10 per case (net after transportation costs and import
duties) sold in the Japanese market.
• Option 2: Licenses production of rice wine to a Japanese wine-maker who also will manage its marketing
and distribution. This wine-maker will charge KWRC a fixed fee of $10 million each year to cover its costs of
maintaining the quality of KRWC products. It will pay KRWC $20 per case of rice wine it sells in Japan.
• Option 3: Purchases a fully operational winery plant from a Japanese wine-maker with excess capacity.
The annual fixed costs of operating the plant are $40 million and the variable costs are $80 per case. KWRC will
sell to independent wholesalers in Japan at $120 case.
(a) Compute the breakeven point for each of the three options that KWRC is considering.
(b) At which unit sales level (cases) of rice wine in Japan would KWRC report the same operating income
under Options B and C?
(c) If KWRC expects the rice wine sales volume in Japan to be somewhere between 1,200,000 cases and
1,500,000 cases, which option would you recommend?