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 $26.50 per case to $29.00 per case. He thinks that, with this price increase, unit sales will decrease from 4,184 cases to 3,750 cases per year. However, this would only reduce total annual Stout revenues to $108,750 from $110,876. Alternatively, David could drop the price of Sedona Stout to $25 per case. This is much closer to the Bock price as well as the Pilsner. Based on his market research, he thinks that this will result in Stout sales increasing to 4,700 cases per year. He is leaning toward this alternative as this will increase Stout revenues from $110,876 to $117,500 per year.

While the company has some cash on hand, neither the company nor Davids family have another $100,000 to invest in the business right now for a new grain hopper and brew house. Since the business is new and has been showing only small profits, David has not been able to get a loan to expand the business. Instead, David wants to fully utilize the machines they already have. In 2013, they used a little over 8,300 machine hours (as shown in Exhibit 1) and the existing five machines have a total of 9,300 machine hours available during the year (assuming normal maintenance and some repairs needed during the year). Thus, the existing machines have approximately 1,000 additional hours available for use. David wants to keep producing and selling all four of his product lines because many of the beer distributors like buying from breweries that offer several different beers.

However, he wants to direct the salespeople to emphasize a certain product when they are out talking to the beer distributors. Given the current machine availability, David is not sure what beer product line to tell the sales people to emphasize in order to maximize his profits.

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. Davids 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 $8,000. Based on market research he has done, David thinks that he could charge $16.50 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 local groceries. Based on his understanding of the market, he thinks he could sell between 3,000 and 12,000 cases of root beer per annum with likely sales of about 6,000 cases.

Root beer could be sold to some of his current distributors. However, soda does not need to be sold through the three-tier system that is required for alcohol sales. Therefore, much of root beer sales would be directly to upscale groceries such as La Grande Orange Grocery and Pizzeria in Phoenix and Whole Foods and AJs Fine Foods with locations throughout Arizona. David could produce the root beer in-house or out-source the production. David has talked with another company who could produce the root beer for AMI using Davids recipe and AMI could sell it as their brand (this option is referred to as private label). It could be purchased from this other company for $13.05 per case. AMI would still need to incur some variable handling costs and some minor fixed costs. Alternatively, AMI could produce the root beer in house. See Exhibit 3 for estimated cost information.

CASE REQUIREMENTS

You have been hired as a consultant to help David with the business. Please address the following questions in preparation for your discussions with him.

1. Ignore any current plans. Using last years actual data and sales mix, how many total cases would David need to sell in order to earn $50,000 in operating income? How many of these cases would be Ocotillo Amber Pilsner?

2. In Question 1, you identified the total number of cases the company needs to sell to earn $50,000 before tax (and how many cases of Ocotillo Amber Pilsner). Assume you did the calculations in Question 1 correctly. However, before discussing your solution with the owner, identify and explain at least three issues related to your analysis and the assumptions employed in your analysis in Question 1 (discuss each concern; what it is and why it is a concern; do not just question general facts of the case such as why AMI is charging a certain price for one product or how AMI can reduce direct material cost).Hint: Think back to the CVP assumptions and consider how those assumptions might create potential issues with your analysis.

Dumuels and Sawers EXHIBIT 1 2013 Cost and Sales Information Panel A: Per Case Information Saguaro Pale Ale Bisbee Bock Ocotillo Amber Pilsner Sedona Stout Total Sales Price Direct Materials per case Direct Labor per case Variable Overhead per case Total Variable Cost per case $21.00 2.75 3.75 5.90 $24.50 2.90 3.75 6.18 $23.50 3.15 3.00 6.10 $26.50 4.00 5.25 6.34 12.40 12.83 12.25 15.59 Contribution Margin per Case $8.60 $11.67 $11.25 $10.91 12,593 6,827 4,184 30,730 Cases Sold last year Direct Labor Hours per case Total Direct Labor Hours last year Machine Hours per case Total Machine Hours last year 0.25 3,148.25 7,126 0.25 1,781.50 0.40 2,850.40 0.20 1,365.40 0.35 1,464.40 7,759.55 0.20 2,518.60 0.25 1,706.75 0.30 1,255.20 8,330.95 Panel B: Contribution Margin Income Statement Saguaro Pale Ale Bisbee Bock Ocotillo Amber Pilsner Sedona Stout Total Sales Variable Costs Contribution Margin Direct Fixed Costs $264,453.00 156,153.20 $108,299.80 10,329.62 97,970.18 $174,587.00 91,426.58 $83,160.42 8,392.91 $160,434.50 83,630.75 $76,803.75 6,017.39 $70,786.36 $110,876.00 65,228.56 $45,647.44 9,893.92 $35,753.52 $710,350.50 396,439.09 $313,911.41 34,633.84 $279,277.57 Segment Margin $74,767.51 C n 245,389.44 Common Fixed Costs Operating Income Taxes (35%) Net Income $33,888.13 11,860.85 n $22,027.28 SE Arizona Microbrewery, Inc.: An Instructional Case on Management Decision Making EXHIBIT 2 Additional Cost Information Panel A: Details of Total Variable Costs Direct Materials Direct Labor Production Supplies Variable Portion of Maintenance Variable Portion of Utilities Variable Office Supplies (sales forms, etc.) Shipping Costs 8% Sales Commission $93,537.20 116,393.25 26,064.41 40,892.55 27,610.57 3,493.88 31,619.19 56,828.04 Total Variable Costs $396,439.09 Panel B: Details of Total Fixed Costs (Direct and Indirect) Brew Master/Quality Control Manager Receiving and Shipping Department Expenses Depreciation Facility Costs (rent, taxes, insurance, etc.) Advertising and Marketing Costs Fixed Portion of Maintenance (including IT support) Fixed Portion of Utilities (including refrigeration) Fixed Portion of Office Supplies Fixed Salary of Salespeople Administrative Staff to Assist Owner $60,293.15 22,511.32 11,712.10 78,938.15 22,994.91 9,992.98 10,390.37 4,305.66 32,221.81 26,662.83 Total Fixed Costs $280,023.28 However 412 Sam EXHIBIT 3 Root Beer Cost Information Panel A: Alternative 1Produce In-House Direct Materials per case Direct Labor per case Variable Overhead per case Total Variable Costs per case $1.75 2.25 3.60 $7.60 Additional Fixed Costs (per year) $37.640.00 These are recurring costs and do not include the initial purchase cost of the machine. Panel B: Alternative 2-Out-Source Production Purchase price per case Variable Overhead per case $13.05 0.10 Total Variable costs per case $13.15 Additional Fixed costs (per year) $6,000.00 1. Ignore any current plans. Using last year's actual data and sales mix, how many total cases would David n order to earn $50,000 in operating income? How many of these cases would be Ocotillo Amber Pilsner 2. In Question 1, you identified the total number of cases the company needs to sell to earn $50,000 before many cases of Ocotillo Amber Pilsner). Assume you did the calculations in Question 1 correctly. However, E Dumuels and Sawers EXHIBIT 1 2013 Cost and Sales Information Panel A: Per Case Information Saguaro Pale Ale Bisbee Bock Ocotillo Amber Pilsner Sedona Stout Total Sales Price Direct Materials per case Direct Labor per case Variable Overhead per case Total Variable Cost per case $21.00 2.75 3.75 5.90 $24.50 2.90 3.75 6.18 $23.50 3.15 3.00 6.10 $26.50 4.00 5.25 6.34 12.40 12.83 12.25 15.59 Contribution Margin per Case $8.60 $11.67 $11.25 $10.91 12,593 6,827 4,184 30,730 Cases Sold last year Direct Labor Hours per case Total Direct Labor Hours last year Machine Hours per case Total Machine Hours last year 0.25 3,148.25 7,126 0.25 1,781.50 0.40 2,850.40 0.20 1,365.40 0.35 1,464.40 7,759.55 0.20 2,518.60 0.25 1,706.75 0.30 1,255.20 8,330.95 Panel B: Contribution Margin Income Statement Saguaro Pale Ale Bisbee Bock Ocotillo Amber Pilsner Sedona Stout Total Sales Variable Costs Contribution Margin Direct Fixed Costs $264,453.00 156,153.20 $108,299.80 10,329.62 97,970.18 $174,587.00 91,426.58 $83,160.42 8,392.91 $160,434.50 83,630.75 $76,803.75 6,017.39 $70,786.36 $110,876.00 65,228.56 $45,647.44 9,893.92 $35,753.52 $710,350.50 396,439.09 $313,911.41 34,633.84 $279,277.57 Segment Margin $74,767.51 C n 245,389.44 Common Fixed Costs Operating Income Taxes (35%) Net Income $33,888.13 11,860.85 n $22,027.28 SE Arizona Microbrewery, Inc.: An Instructional Case on Management Decision Making EXHIBIT 2 Additional Cost Information Panel A: Details of Total Variable Costs Direct Materials Direct Labor Production Supplies Variable Portion of Maintenance Variable Portion of Utilities Variable Office Supplies (sales forms, etc.) Shipping Costs 8% Sales Commission $93,537.20 116,393.25 26,064.41 40,892.55 27,610.57 3,493.88 31,619.19 56,828.04 Total Variable Costs $396,439.09 Panel B: Details of Total Fixed Costs (Direct and Indirect) Brew Master/Quality Control Manager Receiving and Shipping Department Expenses Depreciation Facility Costs (rent, taxes, insurance, etc.) Advertising and Marketing Costs Fixed Portion of Maintenance (including IT support) Fixed Portion of Utilities (including refrigeration) Fixed Portion of Office Supplies Fixed Salary of Salespeople Administrative Staff to Assist Owner $60,293.15 22,511.32 11,712.10 78,938.15 22,994.91 9,992.98 10,390.37 4,305.66 32,221.81 26,662.83 Total Fixed Costs $280,023.28 However 412 Sam EXHIBIT 3 Root Beer Cost Information Panel A: Alternative 1Produce In-House Direct Materials per case Direct Labor per case Variable Overhead per case Total Variable Costs per case $1.75 2.25 3.60 $7.60 Additional Fixed Costs (per year) $37.640.00 These are recurring costs and do not include the initial purchase cost of the machine. Panel B: Alternative 2-Out-Source Production Purchase price per case Variable Overhead per case $13.05 0.10 Total Variable costs per case $13.15 Additional Fixed costs (per year) $6,000.00 1. Ignore any current plans. Using last year's actual data and sales mix, how many total cases would David n order to earn $50,000 in operating income? How many of these cases would be Ocotillo Amber Pilsner 2. In Question 1, you identified the total number of cases the company needs to sell to earn $50,000 before many cases of Ocotillo Amber Pilsner). Assume you did the calculations in Question 1 correctly. However, E