Three entrepreneurs were looking to start a new brewpub near Sacramento, California, called Roseville Brewing Company (RBC). (See the Managerial Application ‘‘Calculating Break-Even Points for a Brewpub.'') Brewpubs provide two products to customers'food from the restaurant segment and freshly brewed beer from the beer production segment. Both segments are typically in the same building, which allows customers to see the beer-brewing process.

After months of research, the owners created a financial model that showed the following projections for the first year of operations:

Sales

Beer sales.................................................................................................. $ 781,200

Food sales ................................................................................................. 1,074,150

Other sales .................................................................................................... 97,650

Total sales .............................................................................................. $1,953,000

Less cost of sales ........................................................................................ 525,358

Gross margin........................................................................................... $1,427,642

Less marketing and administrative expenses............................................ 1,125,430

Operating profit......................................................................................... $ 302,212

In the process of pursuing capital through private investors and financial institutions, RBC was approached with several questions. The following represents a sample of the more common questions asked:

_ What is the break-even point?

_ What sales dollars will be required to make $200,000? To make $500,000?

_ Is the product mix reasonable? (Beer tends to have a higher contribution margin ratio than food, and therefore product mix assumptions are critical to profit projections.)

_ What happens to operating profit if the product mix shifts?

_ How will changes in price affect operating profit?

_ How much does a pint of beer cost to produce?

It became clear to the owners of RBC that the initial financial model was not adequate for answering these types of questions. After further research, RBC created another financial model that provided the following information for the first year of operations:

Answer the following questions using the information in the case.
a. What were potential investors and financial institutions concerned with when asking the questions listed in the case?
b. Why was the first financial model prepared by RBC inappropriate for answering most of the questions asked by investors and bankers? Be specific.
c. If you were deciding whether to invest in RBC, how would you quickly check the reasonableness of RBC's projected operating profit?
d. Why is the question ‘‘How much does a pint of beer cost to produce?'' difficult to answer?
e. Perform sensitivity analysis by answering the following questions.
i. What is the break-even point in sales dollars for RBC?
ii. What is the margin of safety for RBC?
iii. Why can't RBC find the break-even point in units?
iv. What sales dollars would be required to achieve an operating profit of $200,000? $500,000? What assumptions are made in this calculation?
f. Assume total revenues remain the same, but the product mix changes so that each of the three revenue categories is weighted as follows: food 70%, beer 25%, other 5%. How will this shift in product mix affect projected profits?

Transcribed Image Text:

Sales Beer sales (40% of total sales)...................- Food sales (55% of total sales) Other sales (5% of total sales) 781,200 1,074,150 97,650 Total sales Variable Costs Beer (15% of beer sales) Food (35% of food sales) Other (33% of other sales) Wages of employees (25% of sales) Supplies (1% of sales) utilities (3% of sales) Other: credit card, misc. (2% of sales) $1,953,000 117,180 375,953 32,225 488,250 19,530 58,590 39,060 Total variable costs Contribution margin Fixed Costs Saies: manager, chef, brewer Equipment and building maintenance. Advertisin Other: cleaning, menus, misc. Insurance and accounting Property taxes Depreciation Debt service (interest on debt)... $1,130,788 S 822,212 140,000 30,000 20,000 40,000 40,000 24,000 94,000 132,000 Total fixed costs. Operating profit S 520,000 302,212