Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Three entrepreneurs were looking to start a new brewpub near Sacramento, California, called Roseville Brewing Company (RBC). Brewpubs provide two products to customersfood from the

Three entrepreneurs were looking to start a new brewpub near Sacramento, California, called Roseville Brewing Company (RBC). Brewpubs provide two products to customersfood from the 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.

Sales
Beer sales $ 780,000
Food sales 960,000
Other sales 260,000
Total sales $ 2,000,000
Less cost of sales 466,600
Gross margin $ 1,533,400
Less marketing and administrative expenses 1,049,000
Operating profit $ 484,400

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 $250,000? To make $460,000?
  • 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.

Sales
Beer sales (39% of total sales) $ 780,000
Food sales (48% of total sales) 960,000
Other sales (13% of total sales) 260,000
Total sales $ 2,000,000
Variable Costs
Beer (12% of beer sales) $ 93,600
Food (31% of food sales) 297,600
Other (29% of other sales) 75,400
Wages of employees (20% of sales) 400,000
Supplies (3% of sales) 60,000
Utilities (3% of sales) 60,000
Other: credit card, misc. (3% of sales) 60,000
Total variable costs $ 1,046,600
Contribution margin $ 953,400
Fixed Costs
Salaries: manager, chef, brewer $ 130,000
Maintenance 28,000
Advertising 18,000
Other: cleaning, menus, misc 34,000
Insurance and accounting 31,000
Property taxes 21,000
Depreciation 84,000
Debt service (interest on debt) 123,000
Total fixed costs $ 469,000
Operating profit $ 484,400

Required:

Perform a 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 $250,000? $460,000?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Dyslexia A Practitioners Handbook

Authors: Gavin Reid

5th Edition

1118980107, 9781118980101

More Books

Students also viewed these Accounting questions