7.3 Multiculture Bevco Note: While this case is based on a real company, numbers and some company information have been changed to protect confidential information and to make the case appropriate for teaching purposes. Multiculture Bevco (MBC) is a developer and marketer of high-quality, niche alcoholic beverage products. The Oakville, Ontario-based company developed and owns two vodka trademarks: Slava Ultra Premium Vodka and Zirkova Premium Vodka. The Slava and Zirkova trademarks, designs, and recipes are owned by MBC; however, the beverages are produced in Ukraine. The distillery is located in Zolotonosha, in the Cherkasy region, which was the birthplace of vodka during the Polish-Lithuanian empire. The vodka is currently sold in four provinces. MBC's vodka sales represent over 80% of alcoholic beverage imports from Ukraine to Canada. John and Katherine started MBC in 2005 with the launch of Slava, and Zirkova followed a year later They are professional engineers who worked for a major distributor of consumer products after graduating from university, but they always dreamed of owning their own business. That dream was realized when they moved to Ukraine and founded a consulting firm which led them to discover the distillery in Zolotonosha. They saw the potential for niche vodkas specifically designed for how Canadians enjoy vodka but produced in a country that knows vodka. They both work full-time for MBC and currently have three employees. While MBC is profitable, as entrepreneurs their family income depends on MBC's income. Slava is a martini or sipping vodka and is four times distilled and 12 times filtered, which puts it in the category of ultra premium. Zirkova is designed to make mixed drinks taste better; it is also four times dis- tilled and is produced in the traditional method, without any additives. Both products have won gold medals at the San Francisco World Spirits Competition. Required John and Katherine are planning for next year and are considering two things. First, they would like to know how many units of Slava and Zirkova they need to sell next year to reach a target net income of $150,000 (ignore income taxes and duties). They are not sure how to calculate this because most of their fixed costs relate to both products. Second, they wonder how they could improve their costing system to help them make better decisions about their products and their company. MBC's most recent income statement is provided in Exhibit 1. John and Katherine also estimate that 75% of variable manufacturing costs relate to Slava and they expect their current sales mix to stay the same next year. Prepare a report for John and Katherine that addresses their questions. Canadian Managerial Accounting Cases EXHIBIT 1 - INCOME STATEMENT MULTICULTURE BEVCO Income Statement Year Ended December 31, 20X2 Sales Cost of goods sold Gross margin $720,000 312,000 408,000 Operating expenses Accounting and legal Advertising and promotion Bank charges Commissions Consulting Depreciation Insurance Interest Office and general administration Rent Salaries and benefits Travel and vehicle Utilities Taxes and duties Total operating expenses 23,600 70,000 3,400 40,000 11,000 10,000 9,000 6,000 24,000 43,000 95,000 45,000 5,000 8,000 393,000 Income $ 15,000 Notes: 10% of cost of goods sold includes fixed manufacturing overhead. All operating expenses are fixed except commissions. $35,000 of commissions relates to Slava and $5,000 relates to Zirkova. The 20x2 sales revenue represented sales of $400,000 for Slava and $320,000 for Zirkova. Slava sells for $10 per bottle and Zirkova sells for $4 per bottle. These are sales to the various liquor boards in each province. For example, in Ontario, sales are to the LCBO, which then marks up the product for sale to the consumer in its retail outlets