Case Study: Hobart Microbrewery

In 2015, John decided to start up his own brewery, Tasmania Microbrewery Inc (TMI). His family supported his decision and joined him in investing in the business. TMI began operations on January 1, 2015, and now produces four labels of speciality beer: Saguaro Pale Ale, Bisbee Bock, Ocotillo Amber Pilsner, and Sedona Stout.

Assume that the beer is to be produced and sold via a three-tier system (brewing by the producer, sale to distributors, who then sell to retailers), John employs two salespeople, who receive a fixed, monthly salary, plus a 5 percent commission. The beer is sold to distributors in cases of 24 bottles. Product sales and some cost information for 2020, are shown in Table 1. John rents a premises which consists of an area where the brewing process takes place, a refrigeration facility for storing the finished product, and a small office. TMI brewery has five machines, with 9 500 total machine hours available, per year, to produce the beer (assuming the employees of TMI only work one shift with some down-time for regular maintenance). While there is additional space in the facility that could be used to expand the brewing operations, the company would need to purchase an additional grain hopper and brew house (additional equipment and machinery, such as a grain hopper, fermentation and storage tanks, filters, and extra cleaning and waste treatment systems) for about $150,000 (the current water supply and process-control system could be expanded to handle the new machines).

To create a cleaner, clearer product, the beer must be aged, or largered, in a refrigeration unit. The temperature and length of time required for this process to occur varies, according to the type of beer. For example, ales are usually aged/largered at between 4.5 and 13 degrees Celsius, for no more than a few weeks while lagers require a much lower temperature (0 to 7 degrees Celsius), and a much longer time (typically months). TMIs current refrigeration unit allows for different temperatures in different areas of the unit, and is usually run at about 80 percent capacity in order to keep electricity costs down. While, overall, TMIs sales are increasing, this growth has been somewhat erratic. For example, from 2015 to 2018, sales growth was more than 35 percent, compared with only 10 percent, from 2019 to 2020. In view of this, to meet any unforeseen rises in demand, the company has, therefore, adopted a strategy of deliberately stockpiling its beer.

John has not taken a salary since starting up his enterprise. Instead, he has been investing the companys initial, small profits back into the business, with the aim of further growing its bottom line. Recently, he was thinking about increasing the price of Sedona Stout from $27 to $30.00, per case. However, he calculated that this would most likely result in a decrease in the total annual sales of the product, by 10 per cent. He is now considering dropping the price to $25 per case, estimating that this will boost sales by 11 per cent per year.

Right now, John needs $150,000 to cover the cost of the additional equipment required to expand his companys operations. However, since the business is new, and has been posting only small profits, he has not been able to secure a bank loan. He has decided, therefore, to more fully utilise the companys existing machines. He also wants to keep producing all four of his product lines because many of the beer distributors prefer to purchase from breweries offering a variety of beers.

To further maximise profits, John is considering producing a new product, root beer, which is non-alcoholic. This would require different machinery, which could be purchased second-hand, for $8,000. Based on market research, he estimates that he could charge $16 per case, for the new product. However, based on the same market research, he realises there is a lot of uncertainty around how many cases of root beer the company might actually manage to sell. Furthermore, John is less familiar with the root beer market and is aware that there is stiff competition, in the form of a wide range of speciality root beer available for sale in local grocery stores and supermarkets. Taking all of this into account, while he would ideally like to sell anywhere up to 12 000 cases of root beer per annum, he realises that a more realistic figure would be about 6 000 cases.

As the root beer does not need to be sold through the three-tier system required for sales of alcohol, it could be sold directly to speciality retailers, such as Bottle Shop, Thirsty Camel, BWS, and Dan Murphy. John could produce the root beer by outsourcing production to a company that would allow it to be sold under the TMI brand (this option is referred to as private label). The stock would then be bought back by TMI for $13.25 per case, plus some variable handling costs and other minor fixed costs. Alternatively, TMI could produce the root beer in-house (see Table 2 for estimated costs).

Table 1. Per Case Information
	Saguaro Pale Ale	Bisbee Bock	Ocotillo Amber Pilsner	Sedona Stout
Sales Price	$22	$24.5	$24	$27
Direct Materials, per case	2.75	2.5	3.25	4.5
Variable overheads, per case*	6	5.95	5.9	5.5
Cases Sold last year	12 600	7 200	6 800	4 180
Direct Labour Hours, per case	0.25	0.20	0.25	0.35
Machine Hours, per case	0.25	0.35	0.20	0.30
Direct Fixed Costs	10,500	8,400	6,000	9,500
Common Fixed Costs					250,000
*Overhead cost Includes production supplies, variable portion of maintenance, variable portion of utilities, variable office supplies, shipping costs, and 5% sales commission.

Table 2. Root Beer Costs
Panel A: Alternative 1Produce In-House
Direct Materials, per case	$2
Direct Labour Hours, per case	0.3
Variable Overheads, per case	3.5
Additional Fixed Costs, per year	$38,000
Panel B: Alternative 2Out-Source Production
Purchase price, per case	$13.25
Variable Overheads, per case	0.15
Additional Fixed costs, per year	$7,000

John has now approached you, a highly capable and reputable team of management and cost accountants based in Hobart. You were chosen because of your excellent reputation, and extensive knowledge of the local market. John asks you to research the financial viability of the proposed project and to advise him, accordingly. Your advice must be supported both by your Excel workbook calculations and qualitative evidence.

You are required to provide estimates/answers for the following. (Correctly reference all your sources)

1. By referring to last years actual data and sales mix, calculate the total number of cases John would need to sell in order to earn $65,000 after tax. Then, break this figure down into the number of each product, which he would need to sell.
2. Assume you performed the calculations in Question 1 correctly. In your report, identify and explain any issues related to your analysis in Question 1, and your assumptions that informed it (discuss each concern - what it was and why it was a concern; do not simply discuss the general facts of the case, such as why TMI is charging a certain price for a particular product, or how TMI can reduce direct material costs).
3. John has a few options regarding Sedona Stout pricing: (a) keeping the sales price the same (no change); (b) increasing the sales price; or (c) decreasing the sales price. What would you recommend he do and why? Provide both quantitative and qualitative analysis.
4. John wants to achieve a sales figure that will optimise profits, by maximising the companys production capacity. What do you think? Analyse and evaluate the strategies he is proposing to adopt to achieve these goals? Provide both quantitative and qualitative analysis.
5. On the basis of the sales forecast for root beer, recommend which of the two options (in-house or out-sourced production) would be the most financially viable, and why? Support your recommendation with relevant qualitative analysis.
6. What other issues, concerns, or further analysis would you want to discuss with John? These could pertain to whether TMI should add root beer as a new product line and, if so, the issues and concerns related to in-house production versus out-sourcing. You need to consider both numeric and non-numeric issues. Explain how they relate to this company/option, and why they are important to consider
7. Identify and analyse any social responsibility issues related to a brewing business like this (e.g., water usage, power usage, pollution,etc), and recommend some potential solutions.