Please help answer questions 3 and 4. Those are the only ones needed, thanks.

Case #1 Antelope Microbrewery, Inc. 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. 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 Liliana'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 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. a 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. Liliana's 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 Liliana'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 $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. 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.) 3. Ignore the desire to earn $60,000 after tax and refer to the original data. Liliana 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 she do and why? Provide both quantitative and qualitative analysis. (Hint: think about what it means to raise or lower the selling price from the customer's perspective what might it signal? Does the sales price impact volume? What might a change in volume mean from a production standpoint?) 4. Next, ignoring the Sedona Stout information, consider Liliana's question regarding what product line the salespeople should emphasize. Liliana wants the sales efforts to maximize profits and utilize the company's current capacity. What would you tell her? Explain your rationale. (Hint: Are there any constraints? What product line would you emphasize when there are no constraints, and which would you emphasize given the constraint faced by AMI?) 5. Analyzing the sales forecast of root beer, what preliminary course of action do you recommend (in-house or out-source production) and why? Support your recommendation with numbers. (Hint: you may want to calculate metrics from the CVP chapter like breakeven, contribution margin ration, operating leverage, and point of indifference for each of your options, when analyzing your options.) 6. What other issues, concerns or further analysis do you want to discuss with Liliana? Your issues/concerns could pertain to whether AMI should add root beer as a new product line and, if so, the issues concerns of producing in-house versus the out-sourcing. The issues/concerns 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 company/situation and why it is important to consider. (Hint: think about qualitative issues related to the make vs. buy decision as well as the decision to add root beer as a new product line.) While much of our analysis focuses on profit include in your analysis questions about people and planet as well. 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.) 3. Ignore the desire to earn $60,000 after tax and refer to the original data. Liliana 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 she do and why? Provide both quantitative and qualitative analysis. (Hint: think about what it means to raise or lower the selling price from the customer's perspective - what might it signal? Does the sales price impact volume? What might a change in volume mean from a production standpoint?) 4. Next, ignoring the Sedona Stout information, consider Liliana's question regarding what product line the salespeople should emphasize. Liliana wants the sales efforts to maximize profits and utilize the company's current capacity. What would you tell her? Explain your rationale. (Hint: Are there any constraints? What product line would you emphasize when there are no constraints, and which would you emphasize given the constraint faced by AMI?) 5. Analyzing the sales forecast of root beer, what preliminary course of action do you recommend (in-house or out-source production) and why? Support your recommendation with numbers. (Hint: you may want to calculate metrics from the CVP chapter like breakeven, contribution margin ration, operating leverage, and point of indifference for each of your options, when analyzing your options.) 6. What other issues, concerns or further analysis do you want to discuss with Liliana? Your issues/concerns could pertain to whether AMI should add root beer as a new product line and, if so, the issues concerns of producing in-house versus the out-sourcing. The issues/concerns 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 company/situation and why it is important to consider. (Hint: think about qualitative issues related to the make vs. buy decision as well as the decision to add root beer as a new product line.) While much of our analysis focuses on profit, include in your analysis questions about people and planet as well. APPENDIX A Beer Making Process Beer is the overall generic term for fermented malt beverages. There are only two kinds of beer ales and lagers. Within those two broad categories there are many styles. Major ale styles are pale ale, IPA, porter, stout, and barleywine. Among the major lager styles are pilsner, Mrzen, bock, and dunkles (dark lager). AMI makes two ales (Saguaro Pale Ale and Sedona Stout) and two lagers (Ocotillo Amber Pilsner and Bisbee Bock). It is the yeast that is a significant 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 flavor than ales. DIRECT MATERIALS: Beer primarily consists of 4 ingredients: water, barley, hops and yeast. A clarifying agent is also used in the beer making process. The different 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 8 steps: Mashing, Lautering, Boiling, Fermenting, Conditioning, Filtering, Filling and Aging. Mashing: Mashing is the first process in brewing. The barley grains are mixed with water in a large vessel. This mixture is heated up 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. Lautering: Lautering is when the mash is separated into a liquid and the residual grain. There are two stages in lautering. In the first stage, called Wort run-off, a luguid (or extract) is separated in an undiluted state 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. Boiling: Boiling the Wort in the vessel ensures the mixture is sterile and prevents infection. During the boiling step, hops are added to the Wort. The hops contribute bitterness, aroma and flavor compounds to the beer. The boiling must be continuous and intense and typically lasts between 60 and 120 minutes, depending on its intensity, when the hops are added and the volume of Wort expected to evaporate. The Wort is then cooled before fermentation stage. Fermenting & 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. APPENDIX A Beer Making Process (Continued) 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 towards the bottom of the tank. At AMI, the fermentation tanks have cooling jackets on them. Therefore, conditioning can take place in the same tank as fermentation. Conditioning (also called maturation) is when beer is cooled in the tanks to allow yeast to settle to the bottom of the tank. Conditioning allows the flavor of the beer to become smoother and is a natural filtration (removing cloudy material from the beer). Filtering: The beer that comes out of the fermentation tank must be filtered prior to bottling. Filtering the beer stabilizes flavor 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: (a.k.a. "packaging") The filtered beer is put 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. Aging: 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 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). This is called lagering and creates a cleaner, clearer beer. The refrigeration unit allows for different temperatures in different areas of the unit. 2018 COST & SALES INFORMATION Saguaro Pale Ale $ 25.00 Total Ocotillo Amber Pilsner $ 27.50 Bisbee Bock $ 30.00 Sedona Stout $ 32.00 Sales Price per case Direct Materials per case 3.15 3.90 4.00 5.00 Direct Labor per case 4.25 4.75 3.75 6.00 Other Variable Costs per case 8.00 8.50 7.35 9.00 Total Variable costs per case 15.40 $ 9.60 17.15 $ 12.85 15.10 $ 12.40 20.00 $ 12.00 Contribution Margin per Case Number of cases sold last year 12.593 7.126 6.827 4.184 30.730 DLH per case 0.25 0.25 0.20 0.35 Total DLH last year 3,148.25 1,781.50 1,365.40 1,464.40 7,759.55 MH per case 0.20 0.40 0.25 0.30 Total MH last year 2,518.60 2,850.40 1,706.75 1,255.20 8,330.95 Contribution Margin Income Statement Saguaro Pale Ale Bisbee Bock Ocotillo Amber Pilsner Sedona Stout Total $314,825.0 0 $213,780.0 0 $187,742.5 0 $133,888.0 0 Total Sales Revenue $850,235.50 Total Variable Costs 793.932.20 722,210.90 103,087.70 83,680.00 502,910.80 120,892.80 11,365.50 109.527.30 91,569.10 9,236.20 82.332.90 84,654.80 6,620.15 $78.034.65 50,208.00 9,884.30 $40.323.70 Contribution Margin Direct Fixed Costs Segment Margin Common Fixed Costs Operating Income Taxes (35%) Net Income 347,324.70 37,106.15 $310,218.55 $269,927.90 $ 40.290.65 14,101.73 $ 26.188.92 ADDITIONAL COST INFORMATION Detail of Total Variable Costs Direct Material Direct Labor Production Supplies Variable Portion of Maintenance Variable Portion of Utilities Variable Office Supplies (sales forms, etc.) Shipping costs 8% Sales Commission Total $115,687.35 $138,074.00 $36.229.53 $ 56.840.64 $_38.378.69 $ 5,731.07 $ 43.950.67 $ 68,018.84 $502.910.79 Det of Total Fixed Costs (Direct + Indirect) Brew Master / Quality Control manager $65,719.53 Receiving and Shipping department expenses $24,537.34 Depreciation $12,766.19 Facility costs (rent, taxes, insurance, etc) $86,831.97 $25,294.40 $10,992.28 Advertising & Marketing costs Fixed portion of Maintenance (including IT support) Fixed portion of Utilities (including refrigeration) Fixed portion of Office Supplies Fixed Salary of Salespeople $11,429.41 $ 4,689.83 $ 35,443.99 $ 29,329.11 Administrative staff to assist owner Total Fixed Costs 307.034.05 ROOTBEER COST INFORMATION Alternative 1 - Produce In-House Direct Materials per case Direct Labor per case $ 2.25 $ 2.50 $ 4.45 $ 9.20 Variable Overhead per case Total Variable costs per case Additional Fixed costs (per year) $41,404 (These are recurring costs and does not include the purchase of the machine) Alternative 2 - Outsource Production Purchase price per case Variable Overhead per case $ 14.30 $ 0.15 $ 14.45 Total Variable costs per case Additional Fixed costs (per year) $7,000 Case #1 Antelope Microbrewery, Inc. 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. 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 Liliana'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 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. a 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. Liliana's 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 Liliana'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 $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. 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.) 3. Ignore the desire to earn $60,000 after tax and refer to the original data. Liliana 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 she do and why? Provide both quantitative and qualitative analysis. (Hint: think about what it means to raise or lower the selling price from the customer's perspective what might it signal? Does the sales price impact volume? What might a change in volume mean from a production standpoint?) 4. Next, ignoring the Sedona Stout information, consider Liliana's question regarding what product line the salespeople should emphasize. Liliana wants the sales efforts to maximize profits and utilize the company's current capacity. What would you tell her? Explain your rationale. (Hint: Are there any constraints? What product line would you emphasize when there are no constraints, and which would you emphasize given the constraint faced by AMI?) 5. Analyzing the sales forecast of root beer, what preliminary course of action do you recommend (in-house or out-source production) and why? Support your recommendation with numbers. (Hint: you may want to calculate metrics from the CVP chapter like breakeven, contribution margin ration, operating leverage, and point of indifference for each of your options, when analyzing your options.) 6. What other issues, concerns or further analysis do you want to discuss with Liliana? Your issues/concerns could pertain to whether AMI should add root beer as a new product line and, if so, the issues concerns of producing in-house versus the out-sourcing. The issues/concerns 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 company/situation and why it is important to consider. (Hint: think about qualitative issues related to the make vs. buy decision as well as the decision to add root beer as a new product line.) While much of our analysis focuses on profit include in your analysis questions about people and planet as well. 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.) 3. Ignore the desire to earn $60,000 after tax and refer to the original data. Liliana 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 she do and why? Provide both quantitative and qualitative analysis. (Hint: think about what it means to raise or lower the selling price from the customer's perspective - what might it signal? Does the sales price impact volume? What might a change in volume mean from a production standpoint?) 4. Next, ignoring the Sedona Stout information, consider Liliana's question regarding what product line the salespeople should emphasize. Liliana wants the sales efforts to maximize profits and utilize the company's current capacity. What would you tell her? Explain your rationale. (Hint: Are there any constraints? What product line would you emphasize when there are no constraints, and which would you emphasize given the constraint faced by AMI?) 5. Analyzing the sales forecast of root beer, what preliminary course of action do you recommend (in-house or out-source production) and why? Support your recommendation with numbers. (Hint: you may want to calculate metrics from the CVP chapter like breakeven, contribution margin ration, operating leverage, and point of indifference for each of your options, when analyzing your options.) 6. What other issues, concerns or further analysis do you want to discuss with Liliana? Your issues/concerns could pertain to whether AMI should add root beer as a new product line and, if so, the issues concerns of producing in-house versus the out-sourcing. The issues/concerns 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 company/situation and why it is important to consider. (Hint: think about qualitative issues related to the make vs. buy decision as well as the decision to add root beer as a new product line.) While much of our analysis focuses on profit, include in your analysis questions about people and planet as well. APPENDIX A Beer Making Process Beer is the overall generic term for fermented malt beverages. There are only two kinds of beer ales and lagers. Within those two broad categories there are many styles. Major ale styles are pale ale, IPA, porter, stout, and barleywine. Among the major lager styles are pilsner, Mrzen, bock, and dunkles (dark lager). AMI makes two ales (Saguaro Pale Ale and Sedona Stout) and two lagers (Ocotillo Amber Pilsner and Bisbee Bock). It is the yeast that is a significant 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 flavor than ales. DIRECT MATERIALS: Beer primarily consists of 4 ingredients: water, barley, hops and yeast. A clarifying agent is also used in the beer making process. The different 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 8 steps: Mashing, Lautering, Boiling, Fermenting, Conditioning, Filtering, Filling and Aging. Mashing: Mashing is the first process in brewing. The barley grains are mixed with water in a large vessel. This mixture is heated up 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. Lautering: Lautering is when the mash is separated into a liquid and the residual grain. There are two stages in lautering. In the first stage, called Wort run-off, a luguid (or extract) is separated in an undiluted state 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. Boiling: Boiling the Wort in the vessel ensures the mixture is sterile and prevents infection. During the boiling step, hops are added to the Wort. The hops contribute bitterness, aroma and flavor compounds to the beer. The boiling must be continuous and intense and typically lasts between 60 and 120 minutes, depending on its intensity, when the hops are added and the volume of Wort expected to evaporate. The Wort is then cooled before fermentation stage. Fermenting & 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. APPENDIX A Beer Making Process (Continued) 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 towards the bottom of the tank. At AMI, the fermentation tanks have cooling jackets on them. Therefore, conditioning can take place in the same tank as fermentation. Conditioning (also called maturation) is when beer is cooled in the tanks to allow yeast to settle to the bottom of the tank. Conditioning allows the flavor of the beer to become smoother and is a natural filtration (removing cloudy material from the beer). Filtering: The beer that comes out of the fermentation tank must be filtered prior to bottling. Filtering the beer stabilizes flavor 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: (a.k.a. "packaging") The filtered beer is put 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. Aging: 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 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). This is called lagering and creates a cleaner, clearer beer. The refrigeration unit allows for different temperatures in different areas of the unit. 2018 COST & SALES INFORMATION Saguaro Pale Ale $ 25.00 Total Ocotillo Amber Pilsner $ 27.50 Bisbee Bock $ 30.00 Sedona Stout $ 32.00 Sales Price per case Direct Materials per case 3.15 3.90 4.00 5.00 Direct Labor per case 4.25 4.75 3.75 6.00 Other Variable Costs per case 8.00 8.50 7.35 9.00 Total Variable costs per case 15.40 $ 9.60 17.15 $ 12.85 15.10 $ 12.40 20.00 $ 12.00 Contribution Margin per Case Number of cases sold last year 12.593 7.126 6.827 4.184 30.730 DLH per case 0.25 0.25 0.20 0.35 Total DLH last year 3,148.25 1,781.50 1,365.40 1,464.40 7,759.55 MH per case 0.20 0.40 0.25 0.30 Total MH last year 2,518.60 2,850.40 1,706.75 1,255.20 8,330.95 Contribution Margin Income Statement Saguaro Pale Ale Bisbee Bock Ocotillo Amber Pilsner Sedona Stout Total $314,825.0 0 $213,780.0 0 $187,742.5 0 $133,888.0 0 Total Sales Revenue $850,235.50 Total Variable Costs 793.932.20 722,210.90 103,087.70 83,680.00 502,910.80 120,892.80 11,365.50 109.527.30 91,569.10 9,236.20 82.332.90 84,654.80 6,620.15 $78.034.65 50,208.00 9,884.30 $40.323.70 Contribution Margin Direct Fixed Costs Segment Margin Common Fixed Costs Operating Income Taxes (35%) Net Income 347,324.70 37,106.15 $310,218.55 $269,927.90 $ 40.290.65 14,101.73 $ 26.188.92 ADDITIONAL COST INFORMATION Detail of Total Variable Costs Direct Material Direct Labor Production Supplies Variable Portion of Maintenance Variable Portion of Utilities Variable Office Supplies (sales forms, etc.) Shipping costs 8% Sales Commission Total $115,687.35 $138,074.00 $36.229.53 $ 56.840.64 $_38.378.69 $ 5,731.07 $ 43.950.67 $ 68,018.84 $502.910.79 Det of Total Fixed Costs (Direct + Indirect) Brew Master / Quality Control manager $65,719.53 Receiving and Shipping department expenses $24,537.34 Depreciation $12,766.19 Facility costs (rent, taxes, insurance, etc) $86,831.97 $25,294.40 $10,992.28 Advertising & Marketing costs Fixed portion of Maintenance (including IT support) Fixed portion of Utilities (including refrigeration) Fixed portion of Office Supplies Fixed Salary of Salespeople $11,429.41 $ 4,689.83 $ 35,443.99 $ 29,329.11 Administrative staff to assist owner Total Fixed Costs 307.034.05 ROOTBEER COST INFORMATION Alternative 1 - Produce In-House Direct Materials per case Direct Labor per case $ 2.25 $ 2.50 $ 4.45 $ 9.20 Variable Overhead per case Total Variable costs per case Additional Fixed costs (per year) $41,404 (These are recurring costs and does not include the purchase of the machine) Alternative 2 - Outsource Production Purchase price per case Variable Overhead per case $ 14.30 $ 0.15 $ 14.45 Total Variable costs per case Additional Fixed costs (per year) $7,000