1. All of the revenues and costs of producing Murfreesboro Sour Mash are variable, but theyvary with different aspects of the production process. Carefully identify how revenue and eachcost varies. Which costs are product costs and which costs are period costs under Bragg?saccounting method?

2. Extend the income statements under the current accounting method through year 9, at whichpoint Bragg will distill and sell 16,000 barrels per year, and age 128,000 barrels per year.3. Determine the book value of warehouse inventory for the base year. If inventory is the firm?sonly asset, what is its ROA (accounting income divided by book value of assets) in the baseyear? How does the ROA compare to Bragg?s cost of capital, if you assume that it is 10%?4. Repeat your answer to question 2 above assuming all costs had been capitalized as productcosts throughout the life of the business instead of being expensed as period costs.5. Which method of accounting do you believe better reflects the economics of the business?6. Evaluate the decision to increase production of Murfreesboro Sour Mash.7. What problems, if any, do you see this business having, and what are your recommendationsfor the business?

Murfreesboro Sour Mash This case features a bourbon producer that is expanding its operations. Both accounting and strategic issues emerge as the company copes with the problems that come with expansion. The Bragg Bourbon Company, a family owned limited liability company, makes Murfreesboro Sour Mash, a bourbon distilled and aged in Murfreesboro, Tennessee, on a hillside overlooking the Stones River. First, a blend of corn and grains is distilled at a cost of $140. The distilled spirits are aged in a 50-gallon charred oak barrel that costs $76. The barrels are aged in a warehouse for eight years. During the aging process, the barrels are rotated and sampled for quality. Bragg Bourbon Company does not own the warehouse; instead, it rents space in a warehouse at a cost of $20 per barrel per year. Warehouse labor costs incurred by Bragg Bourbon, all variable, are $50 per barrel per year. When the aging process is complete, the bourbon is bottled and sold to wholesalers for $25 per gallon. Due to leakage and evaporation, only 40 gallons of bourbon are sold from each barrel. The used barrels are cut in half and sold for flower pots, the revenue from which just covers the cost of cutting the barrels. For many years, Bragg had distilled and sold 10,000 barrels per year. Several years ago, Bragg expanded production to 16,000 barrels per year. Income statements for the last four years (the year before the expansion began and the first three years of the expansion) are shown below. Barrels sold Barrels distilled Average barrels aged Revenues Cost of goods sold Gross margin Oak barrels Warehouse rental Warehouse labor Net income Base year 10,000 10,000 80,000 Year 1 10,000 16,000 83,000 $10,000,000 $10,000,000 (1,400,000) (1,400,000) 8,600,000 8,600,000 (760,000) (1,216,000) (1,600,000) (1,660,000) (4,000,000) (4,150,000) $2,240,000 $1,574,000 Year 2 10,000 16,000 89,000 Year 3 10,000 16,000 95,000 $10,000,000 (1,400,000) 8,600,000 (1,216,000) (1,780,000) (4,450,000) $1,154,000 $10,000,000 (1,400,000) 8,600,000 (1,216,000) (1,900,000) (4,750,000) $734,000 Bragg's CEO, Braxton \"The General\" Bragg IV, is concerned about the company's declining profitability since the expansion began. 1. All of the revenues and costs of producing Murfreesboro Sour Mash are variable, but they vary with different aspects of the production process. Carefully identify how revenue and each cost varies. Which costs are product costs and which costs are period costs under Bragg's accounting method? 2. Extend the income statements under the current accounting method through year 9, at which point Bragg will distill and sell 16,000 barrels per year, and age 128,000 barrels per year. 3. Determine the book value of warehouse inventory for the base year. If inventory is the firm's only asset, what is its ROA (accounting income divided by book value of assets) in the base year? How does the ROA compare to Bragg's cost of capital, if you assume that it is 10%? 4. Repeat your answer to question 2 above assuming all costs had been capitalized as product costs throughout the life of the business instead of being expensed as period costs. 5. Which method of accounting do you believe better reflects the economics of the business? 6. Evaluate the decision to increase production of Murfreesboro Sour Mash. 7. What problems, if any, do you see this business having, and what are your recommendations for the business