THE CASE

In 2014, Isaac Johnson quit his job at a large beer company to start his own brewery, Johnson Brewing, Inc.(JBI).His family supported his decision and invested in the business along with Isaac.JBI began operations on January 10, 2015 and now produces four labels of specialty beers (Pinetop Pale Ale, Buckeye Bock, Saguaro Pilsner, and Bark Scorpion 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, and grocery stores).Isaac 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 2018 are shown inExhibit 1with additional information inExhibit 2.Isaac rents a facility that is used to make the beer, a refrigeration area to store the beer, and a small office area.JBI brewery has five machines with 9,300 total machine hours available per year to produce beer (assuming JBI 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.¹Additionally, since the company is so new, sales have been growing but erratic (from 2015 to 2016, sales growth was over 45 percent; however, from 2017 to 2018, sales growth was only 12 percent).Thus, keeping more beer on hand allows the company to meet the erratic demand without loss of sales.

EXHIBIT 1: 2018 Cost and Sales Information

EXHIBIT 2: Additional Cost Information

Isaac has not taken a salary since the business started.While the business has been generating a small profit, Isaac has been reinvesting the earnings in the business.He wants to grow the business to generate more profit for his family and himself.Isaac has been considering increasing the price on Bark Scorpion Stout from $24.00 per case to $30.00 per case.He thinks that, with this price increase, unit sales will decrease from 4,476 cases to 3,456 cases per year.However, this would only reduce total annual Stout revenues to $103,680 from $107,424.Alternatively, Isaac could drop the price of Bark Scorpion Stout to $20 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 5,487 cases per year.He is leaning toward this alternative as this will increase Stout revenues from $107,424 to $109,740 per year.

While the company has some cash on hand, neither the company nor Isaac'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, Isaac has not been able to get a loan to expand the business.Instead, Isaac wants to fully utilize the machines they already have.In 2018, they used around 8,290 machine hours (as shown inExhibit 1).Isaac 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, Isaac is not sure what beer product line to tell the sales people to emphasize to maximize his profits.

Finally, Isaac 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, Isaac 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.Isaac'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, Isaac thinks that he could charge $17.25 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.Isaac 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 annum 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 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.Isaac could produce the root beer in-house or out-source the production.Isaac has talked with another company who could produce the root beer for JBI using Isaac's recipe and JBI 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.JBI would still need to incur some variable handling costs and some minor fixed costs.Alternatively, JBI could produce the root beer in house.SeeExhibit 3for estimated cost information.

EXHIBIT 3:Root Beer Cost Information

1.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 recommendation with numbers.

2.What other issues, concerns, or further analysis do you want to discuss with Isaac? Your issues/concerns could pertain to whether JBI should add root beer as a new product line and, if so, the issues or concerns of producing in-house versus out-sourcing.The issues/concerns should include both numeric and non-numeric issues.Donotjust bullet point all kinds of items; instead, talk about specifics and how they relate to this company/situation and why they are important to consider.

Pinetop Pale Saguaro Bark Ale Buckeye Bock Pilsner Scorpion Stout Total Sales Price per case 22.50 26.50 $ 21.00 24.00 Direct Materials per case 2.50 3.00 3.50 3.50 Direct Labor per cage 3.75 3.75 3.00 5.25 Other Variable Costs per case 5.50 6.50 6.54 5.78 Total Variable costs per case 11.75 13.25 13.04 14.53 Contribution Margin per Case 10.75 13.25 7.96 9.47 Number of cases sold last year 11.624 7.589 6,346 4.476 30.035 DLH per case 0.25 0.25 0.20 0.35 Total DLH last year 2,906.00 1,897.25 1,269.20 1,566.60 7.639.05 MH per case 0.20 0.40 0.25 0.30 Total MH last year 2,324.80 3,035.60 1,586.50 1,342.80 8,289.70 Contribution Margin Income Statement: Pinetop Pale Saguaro Bark Ale Buckeye Bock Pilsner Scorpion Stout Total Total Sales Revenue $ 261,540.00 $ 201,108.50 $ 133,266.00 $ 107.424.00 $ 703,338.50 Total Variable Costs 136,582.00 100.554.25 82,751.84 65,036.28 384.924.37 Contribution Margin 124,958.00 100,554.25 50,514.16 42,387.72 318,414.13 Direct Fixed Costs 10.329.62 8,392.91 6.017.39 9.893.92 34.633.84 Segment Margin 114,628.38 $ 92, 161.34 $ 44,496.77 32,493.80 $ 283,780.29 Common Fixed Costs $ 245,389.44 Operating Income 38,390.85 Taxes (35%) 13,436.80 Net Income 24.954.05Detall of Total Variable Costs Total Direct Material 89,704.00 Direct Labor 114,585.75 Production Supplies 26,064.41 Variable Portion of Maintenance 40,892.55 Variable Portion of Utilities 27,610.57 Variable Office Supplies (sales for 3,493.88 Shipping costs 31,619.19 8% Sales Commission 56,267.08 390,237.43 Detail of Total Fixed Costs (Direct + Indirect) Brew Master / Quality Control mana $ 60,293.15 Receiving and Shipping department 22,511.32 Depreciation 11,712.10 Facility costs (rent, taxes, insuranc 78,938.15 Advertising & Marketing costs 22,994.91 Fixed portion of Maintenance (inclux $ 9,992.98 Fixed portion of Utilities (including n $ 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 28Selling Price Per Case $17.25 Alternative 1 - Produce In-House Direct Materials per case 1.55 Direct Labor per case 2.35 Variable Overhead per case 3.76 Total Variable costs per case 7.66 Additional Fixed costs (per year) $38,450 Alternative 2 - Outsource Production Purchase price per case 13.15 Variable Overhead per case 0.15 Total Variable costs per case 13.30 Additional Fixed costs (per year) $6,550