1. The post-Prohibition "three-tier system" requires separating the production, distribution, and retailing of alcohol in most states. That wasn't much of an issue for craft brewers during the explosive growth years between 2011 and 2015 when craft beers doubled their percentage of the beer market and could hardly keep up with demand. However, craft beer volume through the three-tier system is now slowing down, growing less than 2 percent per year, causing craft brewers to turn to direct distribution for growth. Adding direct distribution, mainly through operating taprooms and brewpubs, resulted in 24 percent volume growth. Taprooms are located in working breweries where consumers can buy beer, and brewpubs are restaurants with a brewery. Such establishments now account for almost 10 percent of all US bar traffic and as much as 35 percent of traffic in Denver and San Diego. Some independent craft beer bar chains are closing locations in states like Texas because of lost sales following a 2013 law that relaxed the three-tier system and allowed breweries to sell 5,000 barrels a year for onsite consumption. Small craft brewers are excited about this trend because they make higher margins selling directly than using an indirect channel of distributors and bars.

A brewer's average cost per keg of craft beer is $60, and a keg sells to distributors for $90. The distributor then resells the keg to a bar for $120. Each keg serves more than one hundred 14.5-ounce glasses, the amount typically poured into a 16-ounce glass at a bar to accommodate a foam head. A bar's cost per glass of craft beer poured is $0.88 per glass. The standard in the bar industry is to have 20 percent liquor cost, meaning 20 percent of the price to consumers represents the bar's cost of goods sold, leaving 80 percent for the bar's gross margin.

1. Calculate the price at which a bar will sell one 14.5-ounce glass of craft beer at a gross margin of 80 percent. Show your calculations. [2]
2. What is the bar's dollar markup on a 14.5-ounce glass of craft beer? Show your calculations. [2]
3. What is the bar's markup (as a percentage) on its cost for a 14.5-ounce glass of craft beer? Show your calculations. [2]
4. Determine the brewer's cost per 14.5-ounce serving (one glass). HINT: Use ratios for calculation and show how you do it. [2]
5. What gross margin percentage would a brewer realize if it opened a brewpub or taproom and sold a 14.5-ounce glass of beer at the same price as at which bars sell it per your calculation in (c)? Show your calculations. [2]
6. Is the brewer better off using a direct or indirect channel? Briefly explain your answer. [2]