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	$	799,500
Food sales		963,500
Other sales		287,000
Total sales	$	2,050,000
Less cost of sales		480,725
Gross margin	$	1,569,275
Less marketing and administrative expenses		1,075,500
Operating profit	$	493,775

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 $240,000? To make $570,000?
• 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)	$	799,500
Food sales (47% of total sales)		963,500
Other sales (14% of total sales)		287,000
Total sales				$	2,050,000
Variable Costs
Beer (12% of beer sales)	$	95,940
Food (31% of food sales)		298,685
Other (30% of other sales)		86,100
Wages of employees (21% of sales)		430,500
Supplies (1% of sales)		20,500
Utilities (4% of sales)		82,000
Other: credit card, misc. (3% of sales)		61,500
Total variable costs				$	1,075,225
Contribution margin				$	974,775
Fixed Costs
Salaries: manager, chef, brewer	$	130,000
Maintenance		27,000
Advertising		17,000
Other: cleaning, menus, misc		33,000
Insurance and accounting		35,000
Property taxes		23,000
Depreciation		86,000
Debt service (interest on debt)		130,000
Total fixed costs				$	481,000
Operating profit				$	493,775

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?