'l of? -|- Automatic Zoom v I Arizona Microbrewery, Inc.: An Instructional Case on Management Decision Making Janet A. Samuels Arizona State University Kimberly M. Sawers Seattle Pacific University ABSTRACT: This case provides students with an opportunity to utilize cost volume prot {CVP} analysis tools in a contextually rich environment of a microbrewery. The case explores basic CVP concepts as well as decision making for constrained resources, maI-(e versus buy, and new product development. Further, the case requires quantitative analysis, understanding, and exploration of contextual issues as well as assessment of qualitative factors. While directed at graduate students [MBA and E.M.B.A.}| in a managerial accounting course, this case mayr also be suitable for undergraduate students with some minor modications. Keywords: cost volume prot [CVP]; breakeven, target prot; \"what if\" analysis; constrained resources; make versus buy; add a product line. THE CASE 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 xed 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 ve 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.l 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. I n 2009, David Tucker quit hisjob at a large beer company to start his own brewery, Arizona Microbrewery, lnc. (AMI). We thank the editor, associate editor, and two reviewers for their helpful suggestions for improving the manuscript. Editor's note: Accepted by Lori Holder-Webb. Submitted: February 2015 Accepted: June 201' 5 Pubiisir 90' On tine: June 201' 5 1 Opening and elosing the refrigeration unit when it is very empty results in a greater temperature drop as more warm air gets into the refrigeration unit compared to when the refrigeration unit is very full; thus, keeping the refrigeration unit somewhat full helps reduce refrigeration costs. 409 2 0f7 + Automatic Zoom v I y >> q... 410 Samuefs and Sawers EXHIBIT 1 2013 Cost and Sales Information Panel A: Per Case Information Ocotillo Saguaro Bisbee Amber Sedona Pale Ale Bock Pilsner Stout Total Sales Price $21.00 $24.50 $23.50 $26.50 Direct Materials per case 2.75 2.90 3.15 4.00 Direct Labor per case 3.75 3.75 3.00 5.25 Variable Overhead per case 5.90 6.18 6.10 6.34 Total Variable Cost per case 12.40 12.83 12.25 15.59 Contribution Margin per Case $8.60 $11.67 $11.25 $10.91 Cases Sold last year 12,593 7,126 6,827 4,184 30,730 Direct Labor Hours per case 0.25 0.25 0.20 0.35 Total Direct Labor Hours last year 3,148.25 1,781.50 1,365.40 1,464.40 7,759.55 Machine Hours per case 0.20 0.40 0.25 0.30 '"otal Machine Hours last year 2,518.60 2,850.40 1,706.75 1,255.20 8,330.95 Panel B: Contribution Margin Income Statement Ocotillo Saguaro Bisbee Amber Sedona Pale Ale Bock Pilsner Stout Total Sales 5264,45 3.00 $174,587.00 $160,434.50 $110,876.00 $710,350.50 Variable Costs 156,153.20 91,426.58 83,630.75 65,228.56 396,439.09 Contribution Margin $108,299.80 $83,160.42 $76,803. 75 $45,647.44 $313,91 1.41 Direct Fixed Costs 10,329.62 8,392.91 6,017.39 9,893.92 34,633.84 Segment Nlargln 97,970.18 $74,767.51 $70,786. 36 $35,753.52 $279,277.57 Common Fixed Costs 245,389.44 Operating Income 533,88 8. 13 Taxes (35%) 11,860.85 Net Income 522,027.28 David has not taken a salary since the business started. While the business has been generating a small prot, David has been reinvestin g the earnings in the business. He wants to grow the business to generate more prot 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 $1 10,876. 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 $1 10,876 to $117,500 per year. While the company has some cash on hand, neither the company not David's 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 prots, 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 ve 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 ditferent beers. ED 3 of 7 + Automatic Zoom v I Arizona Microbrewenv, inc: An instmctionai Case on Management Decision Making 411 EXHIBIT 2 Additional Cost Information Panel A: Details of Total Variable Costs Direct Materials $93,537.20 Direct Labor 116,393.25 Production Supplies 26,064.41 Variable Portion of Maintenance 40,892.55 Variable Portion of Utilities 27,610.57 Variable Ofce Supplies (sales forms, etc.) 3,493.88 Shipping Costs 31,619.19 8% Sales Commission 56,828.04 Total Variable Costs $396,439.09 Panel 13: Details of Total Fixed Costs [Direct and Indirect) Brew Masteeruality Controi Manager $60,293.15 Receiving and Shipping Department Expenses 22,511.32 Depreciation 11,712.10 Facility Costs (rent, taxes, insurance, etc.) 78,938.15 Advertising and Marketing Costs 22,994.91 Fixed Portion of Maintenance (including IT support) 9,992.98 Fixed Portion of Utilities [including reigeration) 10,390.37 Fixed Portion of Ofce Supplies 4,305.66 Fixed Salary of Salespeople 32,221.81 Administrative Staff to Assist Owner 26,662.83 Total Fixed Costs $280,023.28 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 prots. 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, ltering, and lling. 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 di'erent machinery rather than the existing ve 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 $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 AJ's 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 David's 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. AM] would still need to incur some variable handling costs and some minor xed costs. Alternatively, AM] could produce the root beer in house. See Exhibit 3 for estimated cost information. >> EU 4 of? - + Automatic Zoom v I CASL-I 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. EXHIBIT 3 Root Beer Cost Information Panel A: Alternative lProducc In-Housc Direct Materials per case 51.?5 Direct Labor per case 2.25 Variable Overhead per case 3.60 Total Variable Costs per case $7.60 Additional Fixed Costs [per year) $37,649.00 These are recurring c0515 and do not include the initial purchase cost of the machine. Panel B: Alternative 2Out-Source Production Purchase price per case 513.05 Variable Overhead per case {1.10 Total Variable costs per case $13.15 Additional Fixed costs (per year) 56,000.00 . Ignore any current plans. Using last year's actual data and sales mix, how many total cases would David need to sell in order to eam $50,000 after tax? How many of these cases would be Ocotillo Amber Pilsner? . In Question I, you identied the total number of cases the company needs to sell to earn $50,000 after tax (and how many cases of Oeotillo Amber Pilsner). Assume you did the calculations in Question I 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 I [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). . Ignore the desire to earn $50,000 after tax and refer to the original data. David has a few options regarding Sedona Stout pricing: (a) keep the sales price the same ( no change), (b) increase the sales price, or (c) decrease the sales price. What would you recommend he do and why? Provide both quantitative and qualitative analysis. Next, ignoring the Sedona Stout information, consider David's question regarding what product line the sales people should emphasize. David wants their sales efforts to maximize profits and utilize the company's current capacity. What would you tell him? Explain your rationale. . Analyzing the sales forecast for root beer, what preliminary course of action do you recommend (in-house or out-source production) and why? Support your recommendation with numbers. . What other issues, concerns, or further analysis do you want to discuss with David? Your issucsfconcems could pertain to whether AMI should add root beer as a new product line and, if so, the issues or concerns of producing in-house versus out- sourcing. The issuesfconcerns should include both numeric and non-numeric issues. Do not just bullet point all kinds of items; instead, talk about specifics and how they relate to this companyfsituation and why they are important to consider. NOTES ABOUT DELIVERABLES REQ. 1 should be answered using Excel or other spreadsheet, Google Sheets is ne too, if accessible. REQ. 2 ensure you read through the full case study to nd any reievant issues that are affecting achieving the $50k after-tax prot. In conjunction with that, or after, remember the CVP lesson. REQ. 3 gures for the alternatives being considered are present in the second to last chapter on page 411; these need to be used. However, quaiitative analysis must also be completed. REQ. 4 is asking you to ignore the possible changes to the sales price of Sedona Stout and reevaiuate the original information. Since it is asking you to consider maximizing prot and capacity constraints, you should evaluate contribution margin from more than one dimension, i.e., consider it from the constraints' W >> 5 of 7 + Automatic Zoom Arizona Microbrewery, Inc.: An Instructional Case on Management Decision Making 413 perspective. It might help to consider all corner points and discuss the benefits/detriments or real-world difficulties surrounding corner points. Also, ask why do we round when doing corner points? If you understand why we round, this will help you answer question 4. REQ. 5 - is another spreadsheet heavy question. A graph of the linear revenue and linear cost relationships would help; noting that the point of intersection should represent the break-even point. REQ. 6 - since you have already covered the Balanced Scorecard and Strategy Mapping, refer back to what you did in the previous case study and implement some of those issues in the answer. It does NOT need to be nearly as comprehensive as was the answer for the full case study, but it should address quantitative and qualitative issues; three should suffice. NOTES ABOUT PRESENTATION Do not forget to play the role assigned in the case study, i.e., consultant. . Treat your audience like they are David OR like you are presenting to your superior in the consulting firm. Learn what you want to say and improve upon what you did in the first case study and presentation.5 of? + Automatic Zoom v I APPENDIX A Beer-Making Process Beer is the overall generic term for fermented malt beverages. There are only two kinds of beer: ale and lager. Within those two broad categories there are many styles. Major ale styles are pale ale, India Pale Ale (LPA), porter, stout, and barleywine. Among the major lager styles are pilsner, Ma'rzen, bock, and dunkles (dark lager}. AM] makes two ales (Saguaro Pale Ale and Sedona Stout) and two lagers (0cotillo Amber Pilsner and Bisbee Bock}. It is the yeast that is the signicant difference between the ale and the lager. Ale yeasts coagulate loosely at the top of the fermentation tank. Given the type of yeast, ales ferment best between 64 to 70 degrees Fahrenheit. Lager yeasts are more successful at colder temperatures, typically 50 to 55 degrees Fahrenheit and coagulate closer to the bottom of the fermentation tank. Lager yeasts also tend to ferment more aggressively, leaving behind less residual sweetness and avor than ales. Direct Materials Beer primarily consists of four ingredients: water, barley, hops, and yeast. A clarifying agent is also used in the beer- making process. The di'erent types of beer require different proportions of these ingredients and even slightly different ingredients (e.g., pale ale uses a pale malted barley while stout is made using a darker roasted barley). Brewing Process Work in the brewery is typically divided into eight steps: Mashing, Lautering, Boiling, Fermenting and Conditioning, Filtering, Filling, and Aging. Masking Mashing is the rst process in brewing. The barley grains are mixed with water in a large vessel. This mixture is heated with periodic breaks, or rests, at certain temperatures to allow enzymes in the malted grains to break down the starch in the grain into sugars. Lowering Lautering is when the mash is separated into a liquid and the residual grain. There are two stages to lautering. In the rst stage, called Wort Run-Off, a liquid (or extract] is separated in an undiluted form from the used grains. The second stage is called sparging. During sparging, the extract that remains with the grains is rinsed off with hot water. The results of these two stages are combined and the result is a dark, sugary liquid called Wort. This is returned to the original Mashing vessel. Boiiing Boiling the Wort in the vessel ensures that the mixture is sterile and prevents infection. During the boiling step, hops are added to the Wort. The hops contribute bitterness, aroma, and avor compounds to the beer. The boiling must be continuous and intense (rolling boil) and typically lasts between 60 and 120 minutes, depending on its intensity, when the hops are added and the amount of Wort expected to evaporate. The Wort is then cooled before the fermentation stage. Fermenting and Conditioning The cooled Wort is put into a fermentation tank and yeast is added, which starts the fermentation process. This is also the point at which the product is first called beer. It is during this stage that fermentable sugars are metabolized into alcohol and carbon dioxide (the bubbles in beer]. As noted above, fermentation temperatures are very different for ales versus lagers. Fermentation takes about a week. When the sugars in the fermenting beer have been almost completely digested, the fermentation slows down and the yeast cells will naturally start to die off and begin to settle to the bottom of the tank. At AMI, the fermentation tanks are equipped with cooling jackets. Therefore, conditioning can take place in the same tank as fermentation. Conditioning (also called \"n1aluration\") is when beer is cooled in the tanks to allow the yeast to settle to the bottom of the tank. Conditioning allows the flavor of the beer to become smoother and is a natural filtration process [removing cloudy material from the beer). Filtering The beer that comes out of the fermentation tank must be ltered prior to bottling. Filtering the beer stabilizes avor and gives beer its gloss or \"shine." Filtering removes much of the yeast and any solids (e.g., hops and other grain particles) that remain in the beer. Filling >> 7 of7 + Automatic Zoom v I Arizona Microbrewenv, inc; An instructional Case on Management Decision Mailing 415 The lling process (also called \" packaging\") is putting the beer into the bottles in which it will leave the brewery. At this point, carbon dioxide is added to the bottling process to increase the carbon dioxide in the beer. Cases of beer (consisting of 24 bottles} are then put into aging. A gi'ng Beer is stored (aged or \"lagered") in the refrigerator unit and the temperature and length of the aging will vary based on the type of beer. Ales are usually aged no more than a few weeks. The aging process is generally done at 40 to 55 degrees Fahrenheit. Lagers are similarly aged but at much lower temperatures, 32 to 45 degrees Fahrenheit, and for a much longer time (typically months). Lagering creates a cleaner, clearer beer. The refrigeration unit allows for different temperatures in different areas of the unit. TABLE 1 Summary of Student Feedback Undergraduate Graduate Managerial Cost E..M.B.A. n 1/4 50 n \"Ii 27 n '14 23 Questions on Learning Objectives 1. Understand how to calculate the breakeven point as well as detem'iine the level of sales needed to achieve a desired target prot. 3.90 4.43 4.32 2. Develop an understanding of the underlying cost volume prot (CVP) analysis assumptions and the ability to identify potential related concems. 3.82 4.52 4.32 3. Examine the effects of changes in variable costs. xed costs, selling price, and volume on net operating income. 4.08 4.44 4.45 4. Identify both quantitative and qualitative factors to be considered in decision making. 4.40 4.81 4.14 5. Determine product emphasis for prot maximization, given capacity constraints. 4.04 4.26 4.23 IS. Analyze whether a new product line should be added. 4.24 4.41 4.14 7'. Determine if a product line should be made inhouse or outsourced (make versus buy). 4.18 4.6"r 4.23 Questions on General Feedback 1. I feel more confident with the material after completing the case. 3.?3 4.11 4.20 2. i thought the case was a valuable learning experience. 4.20 4.41 4.35 Survey scale was 1 to 5. For learning objective questions, 1 corresponded to the case not covering that learning objective very well and 5 corresponded to the case covering Illa! learning objective very well. For general feedback, 1 was \"Strongly Disagree" and S was \"Strongly Agree." a9 in.- >>