SPRING 2021

In 2015, Alex Montella quit his job at a large beer company to start his own brewery, Siena Brewery, Inc. (SI). His family supported his decision and invested in the business along with Alex.

Siena Brewery doesnt pay income taxes. The company began operations on January 7, 2016 and now produces four labels of specialty beers (Perone Pale Ale, Moretti Bock, Nastro Blue Pilsner, and Menabrea Stout). In much of the United States, beer is sold in a three-tier system. Under this system, beer is manufactured by producers, sold to distributors, and then sold to retailers (such as liquor stores, drug stores, and grocery stores).

Alex employs two salespeople who receive a xed monthly salary plus a 8 percent commission. All beer is sold to beer distributors in cases of 24 bottles. Product sales and cost information for 2019 are shown in Exhibit 1 with additional information in Exhibit 2.

Alex rents a facility that is used to make the beer, a refrigeration area to store the beer, and a small ofce area. SI Brewery has ve machines with 9,000 total machine hours available per year to produce beer (assuming SI keeps its machines running 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).

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.

Additionally, since the company is so new, sales have been growing but erratically (from 2016 to 2017, sales growth was over 45 percent; however, from 2018 to 2019, sales growth was only 15 percent). Thus, keeping more beer on hand allows the company to meet the erratic demand without loss of sales.

Alex has not taken a salary since the business started. While the business has been generating a small prot, Alex has been reinvesting the earnings in the business. He wants to grow the business to generate more prot for his family and himself.

Alex has been considering increasing the price on Menebrea Stout from $25.50 per case to $28.00 per case. He thinks that, with this price increase, unit sales will decrease from 4,155 cases to 3,725 cases per year. Alternatively, Alex could drop the price of Menebrea Stout to $23.75 per case. This is much closer to the Moretti Bock price as well as the Nastro Blue Pilsner. Based on his market research, he thinks that this will result in Menebrea Stout sales increasing to 4,720 cases per year.

While the company has some cash on hand, neither the company nor Alexs 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, Alex has not been able to get a loan to expand the business. Instead, Alex wants to fully utilize the machines they already have. In 2019, they used around 8,000 machine hours (as shown in Exhibit 1) and the existing ve machines have a total of 9,000 machine hours available during the year (assuming normal maintenance and some repairs needed during the year). Thus, the existing machines have around 1,000 additional hours available for use.

Alex 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 different beers.

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, Alex is not sure what beer product line to tell the salespeople to emphasize in order to maximize his profits.

REQUIREMENTS

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

1. Ignore any current plans. Using the data and sales mix provided for 2019 answer the following questions:

1. How many total cases would Alex need to sell in order to earn $77,000 operating income?
2. What is the percentage increase in the total cases over the 2019 data if the desired operating income is $77,000?
3. How many of these cases would be Nastro Blue Pilsner (assume that sales mix remains the same)?

2. In Question 1, you identified the total number of cases the company needs to sell to earn $77,000 operating income (and how many cases of Nastro Blue Pilsner). Assume you did the calculations in Question 1 correctly. However, before discussing your solution with the owner you need to address the following:

1. Think back to the CVP assumptions and consider how those assumptions (refer to CVP materials from class) might create potential issues with your analysis. Identify and explain at least three issues related to your analysis and the assumptions employed in your analysis in Question 1. Discuss each concern; what it is and why it is a concern; do not just question general facts of the case such as why SI is charging a certain price for one product or how SI can reduce direct material cost.
2. Consider production capacity and how that might affect this analysis.
3. Alex is not paying himself a salary. Long-term, this is not a viable way for Alex to run the business. An entrepreneur starting a business should make sure he/she factors some type of salary (reasonable amount) for himself/herself into the CVP model. What will happen to the companys overall breakeven point if Alex starts to pay himself a yearly salary of $35,000?

3. Ignore the desire to earn $77,000 in operating income and refer to the original data. Alex has a few options regarding Menabrea Stout pricing:

Option 1: keep the sales price the same (no change).

Option 2: increase the sales price

Option 3: decrease the sales price.

1. What would you recommend he do and why?
2. Provide both quantitative and qualitative analysis.

4. Next, ignoring the Menabrea Stout information in question 3, consider Alexs question regarding what product line the salespeople should emphasize. Alex wants their sales efforts to maximize profits and utilize the companys current capacity. You need to take into consideration that SI has to deal with constrained resources and that you are only provided with clear data for machine hours.

1. What would you tell him? Explain your rationale from a quantitative perspective.
2. List and explain two qualitative factors that Alex should considered in this decision.