Question $1$: Ignore any current plans. Using last year$$s actual data and sales mix, how many total cases $($units$)$ would David need to sell in order to earn $$50,000$ after tax? What would be the number of cases $($units$)$ sold for each product?

Question $2$: Ignore the desire to earn $$50,000$ after tax and refer to the original data. David has a few options regarding Sedona Stout pricing $($noted on pages $3$ and $4)$: $($a$)$ keep the sales price the same $($no change$),($b$)$ increase the sales price, or $($c$)$ decrease the sales price. Calculate the total contribution margin of Sedona Stout $($in total dollars$)$ for going with each option $($remember$,$ variable costs may change with the options$).$

Question $3$:Based on the case facts and your calculations, provide a qualitative analysis and specific recommendations to the owner. In you writeup, discuss the assumptions that you made when utilizing the CVP analysis. Provide specific recommendations based on the owner$$s plans.

Objectives:

To understand how to use cost volume profit $($CVP$)$ analysis during management control decision making.

Allied Microbrewery, Inc

THE CASE

In $2009,$ David Tucker quit his job at a large beer company to start his own brewery, Allied

Microbrewery, Inc. $($AMI$),$ located in Arizona. His family supported his decision and invested

in the business along with David. AMI began operations on January $10,2010$ and now produces

four labels of specialty beers $($Saguaro Pale Ale, Bisbee Bock, Ocotillo Amber Pilsner, and

Sedona Stout$).$ An explanation of the beer$-$making process is shown in Appendix A$.$

In much of the United States $($including Arizona$),$ beer is sold in a "three$-$tier" system.

Under this system, beer is manufactured by producers, sold to distributors, who then sell to

retailers $($such as liquor stores, drug stores, and grocery stores$).$ David employs two salespeople

who receive a fixed monthly salary plus an $8$ percent commission. All beer is sold to beer

distributors $($primarily in the Southwestern United States$)$ in cases of $24$ bottles. Product sales

and cost information for $2013$ are shown in Exhibit $1$ with additional information in Exhibit $2.$

David rents a facility that is used to make the beer, a refrigeration area to store the beer, and a

small office area. AMI brewery has five machines with $9,300$ total machine hours available per

year to produce beer $($assuming AMI remains on one shift with some normal maintenance,

breaks, etc.$).$ While there is an empty space in the facility that could be used to expand the beer

operations, the company would need to purchase an additional grain hopper and brew house for

about $$100,000($the current water system and process control system could be expanded to

handle the new machine$).$ As discussed in Appendix A$,$ beers are aged in a refrigeration area

prior to sale. The current refrigeration unit allows for different temperatures in different areas

of the unit and the unit is usually running about $80$ percent full. Keeping the refrigeration unit

somewhat full helps reduce refrigeration costs. $^(1)$ Additionally, since the company is so new,

sales have been growing but erratic $($from $2010$ to $2011,$ sales growth was over $45$ percent;

however, from $2012$ to $2013,$ sales growth was only $12$ percent$).$ Thus, keeping more beer on

hand allows the company to meet the erratic demand without loss of sales $($continues on the

next page$).$ EXHIBIT $1$

$2013$ Cost and Sales Information

Panel A: Per Case Information

Panel B: Contribution Margin Income Statement

David has not taken a salary since the business started. While the business has been generating a

small profit, David has been reinvesting the earnings in the business. He wants to grow the

business to generate more profit for his family and himself. David has been considering

increasing the price on Sedona Stout from $$26\mathrm{.}50$ per case to $$29\mathrm{.}00$ per case. He thinks that,

with this price increase, unit sales will decrease from $4,184$ cases to $3,750$ cases per year. Finally, David and his family love root beer. Root beer follows a somewhat similar process to beer in that the ingredients are mixed together to form a "culture" that then goes through fermenting, filtering, and filling. Root beer would not need to be aged or stored in the refrigerator. There is an empty area in the current microbrewery facility that could be dedicated to making root beer. As a result, David has been talking with his family about producing and selling a line of specialty root beer. Root beer would be produced using different machinery rather than the existing five beer machines. David's sister knows someone who is getting out of the soda business and would be willing to sell the used machinery needed to make the root beer for $\backslash (\backslash$$ $8,000\backslash ).$ Based on market research he has done, David thinks that he could charge $\backslash (\backslash$$ $16\mathrm{.}50\backslash )$ per case of root beer. Based on the same market research, there is a lot of uncertainty in how many cases of root beer the company could sell. David is less familiar with the root beer market and there is a wide range in sales of specialty root beer in the l APPENDIX A

Be