Three entrepreneurs were looking to start a new brewpub near Sacramento, California, called Roseville Brewing Company (RBC). Brewpubs provide two products to customersfood fromthe restaurant segment and freshly brewed beer from the beer production segment. Both segments are typically in the same building, which allows customers to see the beer-brewing process.

After months of research, the owners created a financial model that showed the following projections for the first year of operations.

SalesBeer sales$727,200Food sales969,600Other sales323,200Total sales$2,020,000Less cost of sales516,312Gross margin$1,503,688Less marketing and administrative expenses1,077,000Operating profit$426,688

In the process of pursuing capital through private investors and financial institutions, RBC was approached with several questions. The following represents a sample of the more common questions asked:

• What is the break-even point?
• What sales dollars will be required to make $120,000? To make $530,000?
• Is the product mix reasonable? (Beer tends to have a higher contribution margin ratio than food, and therefore product mix assumptions are critical to profit projections.)
• What happens to operating profit if the product mix shifts?
• How will changes in price affect operating profit?
• How much does a pint of beer cost to produce?

It became clear to the owners of RBC that the initial financial model was not adequate for answering these types of questions. After further research, RBC created another financial model that provided the following information for the first year of operations.

SalesBeer sales (36% of total sales)$727,200Food sales (48% of total sales)969,600Other sales (16% of total sales)323,200Total sales$2,020,000Variable CostsBeer (15% of beer sales)$109,080Food (32% of food sales)310,272Other (30% of other sales)96,960Wages of employees (24% of sales)484,800Supplies (2% of sales)40,400Utilities (3% of sales)60,600Other: credit card, misc. (1% of sales)20,200Total variable costs$1,122,312Contribution margin$897,688Fixed CostsSalaries: manager, chef, brewer$139,000Maintenance24,000Advertising13,000Other: cleaning, menus, misc31,000Insurance and accounting36,000Property taxes17,000Depreciation89,000Debt service (interest on debt)122,000Total fixed costs$471,000Operating profit$426,688

how to sensitivity analysis by answering the following questions:

a.What is the break-even point in sales dollars for RBC?

b.What is the margin of safety for RBC?

c.What sales dollars would be required to achieve an operating profit of $120,000? $530,000?