QUESTION: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 recommendations with numbers.

INFO:

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. * 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 year 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 the 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 TM using David's recipe and TM 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.TM would still need to incur some variable handling costs and some minor fixed costs.Alternatively TM could produce the root beer in house.See Exhibit 3 for estimated cost information.

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 office supplies 3,493.88 Shipping costs 31,619.19 8% sales commission 56,828.04 Total variable costs $396,439.09 Panel B: Details of Total Fixed Costs (Direct and Indirect) Brew master/quality control 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 9,992.98 Fixed portion of utilities (including refrigeration) 10,390.37 Fixed portion of office supplies 4,305.66 Fixed salary of salespeople 32,221.81 Administrative staff to assist owner 26,662.83 Total fixed costs $280,023.28Root Beer Cost Information Panel A: Alternative 1 - produce in-house Direct materials per case $1.75 Direct labor per case 2.25 Variable overhead per case 3.50 Total variable costs per case $7.50 Additional fixed costs per year - not including the initial purchase cost of the machine $37,640.00 Panel B: Alternative 2 - out-source production Purchase price per case $13.05 Variable overhead per case 0.25 Total variable costs per case $13.30 Additional fixed costs per year $6,000.00Exhibit 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 2.75 2.90 3.15 4.00 Direct labor 3.75 3.75 3.00 5.25 PEBYJBAD a geIJEA 5.90 6.18 6.10 6.34 Total variable cost 12.40 12.83 12.25 15.59 Contribution margin 58.60 $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 D.25 D.25 D.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 0.4 0.30 0.25 Total machine hours last year 2,518.50 2,850.40 2,048.10 1,046.00 8,463.10 Panel B: Contribution Margin Income Statement Sales 264,453.00 $174,587.00 $160,434.50 $110,876.00 $710,350.50 51505 8 gelJen 156,153.20 91,426.58 83,630.75 65,228.56 396,439.09 Contribution margin 108,299.80 23,160.42 75,803.75 45,647.44 313,911.41 Direct fixed costs 10,329.62 8,392.91 6,017.39 9,893.92 34,633.84 segment margin $97,970.18 $74,767.51 $70,786.36 $35,753.52 279,277.57 Common fixed costs 245,389.44 Operating income 33,888.13 Taxes (35%6) 11,860.85 Net income $22,027.28