Tempe Microbrewery

In 2009, David Tucker quit his job at a large beer company to start his own brewery, Tempe

Microbrewery (TM). His family supported his decision and invested in the business along with David.

TM 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 Sates (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 fixed 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. TM brewery has five machines with 9,300 total machine

hours available per year to produce beer (assuming TM 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. 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.

David has not taken a salary since the business started. While the business has been generating a small

profit, David has been reinvesting the earnings in the business. He wants to grow the business to

generate more profit 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 $110,876. 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 $110,876 to $117,500 per year.

While the company has some cash on hand, neither the company nor Davids 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, 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

under 8,500 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 approximately 800 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 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, David is not sure what beer product line to tell the sales people

to emphasize in order to maximize his profits.

2

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. Davids 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 AJs 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 Davids 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.

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.

1. Ignore any current plans. Using last years actual data and sales mix, how many total cases

would David need to sell in order to earn $80,000 before tax? How many cases of each of the

four labels would TM need to produce?

2. In Question 1, you identified the total number of cases the company needs to sell to earn

$80,000 before tax. Assume you did the calculations in Question 1 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 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 TM

is charging a certain price for one product or how TM can reduce direct material cost.

3. Ignore the desire to earn $80,000 before 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.

4. Next, ignoring the Sedona Stout calculations in requirement 3, consider Davids question

regarding what product line the sales people should emphasize. David wants their sales efforts

to maximize profits and utilize the companys current capacity. What would you tell him?

Explain your rationale.

5. 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

Saguaro Pale Ale Bisbee Bock Sedona Stout Amber Pilsner $11.25 $8.60 $11.67 $10.91 $0.20 $0.40 $0.30 $0.20 Contribution Margin per case Machine Hr Requirement per case Contribution margin per unit of machine Ranking $43 $29.18 $45 $36.27 IIIVI 108,299.80 83,160.42 76,803.75 45,647.44 Total: $313,911.41 Required Profit+ Common Fixed Costs Contribution Required to Meet Target Profit $80,000+$280,023.28=$360,023.28 Bisbee Bock Saguaro Pale Ale ????? Ocotillo Amber Pilsner Sedona Stout ???? ???? ??? Totals: $360,023.28 Contribution per $8.60 $11.67 $10.91 Case # of Cases Required 2013 Cases Sold 12,593 7,126 6,827 4,184 Additional Req. Target income=$80,000 before tax Total fixed income=$280,023.28 Total Contribution needed to be earn for each target profit=$80,000+$280,023.28=$360,023.28 Total contribution margin/case of each label =($8.60+$11.67+$11.25+$10.91)=$42.43 # of cases needed/label=$360,023.28/$42.43=$8,485.11 $8,486 cases/label