ntegrative Cases 3-72 (Algo) Financial Modeling (LO 3-1, 2, 3, 4, 5) Three entrepreneurs were looking to start a new brewpub near Sacramento, California, called Roseville Brewing Company (RBC). Brewpubs provide two products to customersfood from the restaurant segment and freshly brewed beer from the beer production segment. Both segments are typically in the same building, which allows customers to see the beer-brewing process. After months of research, the owners created a financial model that showed the following projections for the first year of operations.

Sales
Beer sales	$	937,200
Food sales		958,500
Other sales		234,300
Total sales	$	2,130,000
Less cost of sales		520,146
Gross margin	$	1,609,854
Less marketing and administrative expenses		1,079,400
Operating profit	$	530,454

In the process of pursuing capital through private investors and financial institutions, RBC was approached with several questions. The following represents a sample of the more common questions asked:

• What is the break-even point?
• What sales dollars will be required to make $230,000? To make $580,000?
• Is the product mix reasonable? (Beer tends to have a higher contribution margin ratio than food, and therefore product mix assumptions are critical to profit projections.)
• What happens to operating profit if the product mix shifts?
• How will changes in price affect operating profit?
• How much does a pint of beer cost to produce?

• Sales
  Beer sales (44% of total sales)	$	937,200
  Food sales (45% of total sales)		958,500
  Other sales (11% of total sales)		234,300
  Total sales				$	2,130,000
  Variable Costs
  Beer (14% of beer sales)	$	131,208
  Food (33% of food sales)		316,305
  Other (31% of other sales)		72,633
  Wages of employees (21% of sales)		447,300
  Supplies (2% of sales)		42,600
  Utilities (4% of sales)		85,200
  Other: credit card, misc. (1% of sales)		21,300
  Total variable costs				$	1,116,546
  Contribution margin				$	1,013,454
  Fixed Costs
  Salaries: manager, chef, brewer	$	136,000
  Maintenance		22,000
  Advertising		18,000
  Other: cleaning, menus, misc		31,000
  Insurance and accounting		37,000
  Property taxes		16,000
  Depreciation		93,000
  Debt service (interest on debt)		130,000
  Total fixed costs				$	483,000
  Operating profit				$	530,454

• Required:

  Perform a sensitivity analysis by answering the following questions:

  a. What is the break-even point in sales dollars for RBC

• b. What is the margin of safety for RBC?

  c. What sales dollars would be required to achieve an operating profit of $230,000? $580,000?