In 2013, Liliana Perez quit her job at a large beer company to start her own brewery, Antelope Microbrewery, Inc. (AMI). Her family supported her decision and invested in the business along with Liliana. AMI started operations on January 10, 2014 in Flagstaff, Arizona and 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, grocery stores, etc.). Liliana employs two salespeople who receive a fixed monthly salary plus an 8% commission. All beer is sold in cases of 24 bottles to beer distributors (primarily in the Southwestern United States). Product sales and cost information for 2018 is shown in Exhibit 1 with additional information in Exhibit 2. Liliana rents a facility which is used to make the beer, a refrigeration area to store the beer and a small office area. AMI brewery has 5 machines with 9,300 total machine hours available per year to produce beer (assuming they remain 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% 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 2014 to 2015, sales growth was over 45%; however, from 2016 to 2017, sales growth was only 12%). Thus, keeping more beer on hand allows the company to meet the erratic demand without loss of sales.Liliana has not taken a salary since the business started. While the business has been generating a small profit, Liliana has been reinvesting earnings back into the business. She wants to grow the business to generate more profit for herself and for her family. Liliana has been considering increasing the price on Sedona Stout from $32.00 per case to $35.00 per case. She thinks that, with this price increase, unit sales will decrease from 4,184 cases to 3,750 cases per year. However, this would reduce total annual Stout revenues from $133,888 to $131,7250. Alternatively, Liliana could drop the price of Sedona Stout to $30 per case. This is much closer to the Bock price as well as the Pilsner. Based on her market research, she thinks that this will result in sales increasing to 4,700 cases per year. She is leaning towards this alternative as this will increase Stout revenues from $133,888 to $141,000 per year.

While the company has some cash on hand, neither the company nor Lilianas 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, Liliana has not been able to get a loan to expand the business. Instead, Liliana wants to fully utilize the machines they already have. In 2018, 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 about 1,000 additional hours available for use. Liliana wants to keep producing and selling all four product lines as many of the beer distributors like buying from breweries with several different beers. However, she wants to direct the salespeople to emphasize a certain product when they are out talking with beer distributors. Given the current machine availability, Liliana is not sure what beer product line to tell the salespeople to emphasize to maximize her profits.Finally, Liliana and her 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, Liliana has been talking with her family about producing and selling a line of specialty root beer. Root beer would be produced on different machinery rather than o the existing five beer machines. Lilianas sister knows someone who is getting out of the soda business and would be willing to sell them the used machinery needed to make the root beer for $8,000. Based on market research she has done; Liliana thinks that she could charge $18.50 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. Liliana is less familiar with the root beer market and there is a wide range of sales of specialty root beer in the local groceries. Based on her understanding of the market, she thinks she could sell between 3,000 and 12,000 cases of root beer with likely sales of about 6,000 cases. Root beer could be sold to some of her current distributors. However, soda does not need to be sold through the three-tier system 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 AJ's Fine Foods with locations throughout Arizona. Liliana could produce the root beer in-house or out-source production. Liliana has talked with another company who could produce the root beer for AMI using Lilianas 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 $14.30 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.

QUESTIONS

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

1. Ignore any current plans. Using last year's actual data and sales mix, how many total cases would Liliana need to sell to earn $60,000 after tax? How many of these cases would be Ocotillo Amber Pilsner?

2. In question one, you identified the total number of cases the company needs to sell to earn $60,000 after tax (and how many cases of Ocotillo Amber Pilsner). Assume you did the calculations in question one 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 one (discuss each concern; what it is and why it is a concern; do NOT just question general facts of the case such as why we are charging a certain price for one product or how we can reduce direct material cost). (Hint: think back to the CVP assumptions and consider how those assumptions might create potential issues with your analysis.)