Three entrepreneurs were looking to start a new brewpub near Elizabethtown, PA, called Bluejay Brewing Company (BBC). 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	$ 781,200
Food sales	1,074,150
Other sales	97,650
Total sales	$ 1,953,000
Less cost of sales	525,358
Gross margin	$ 1,427,642
Less marketing and administrative expenses	1,168,990
Operating profit	$ 258,652

In the process of pursuing capital through private investors and financial institutions, BBC 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 $150,000? To make $500,000?
• 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 BBC 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 (40% of total sales)	$ 781,200
Food sales (55% of total sales)	1,074,150
Other sales (5% of total sales)	97,650
Total sales		$ 1,953,000
Variable Costs
Beer (15% of beer sales)	$ 117,180
Food (35% of food sales)	375,953
Other (33% of other sales)	32,225
Wages of employees (25% of sales)	488,250
Supplies (1% of sales)	19,530
Utilities (3% of sales)	58,590
Other: credit card, miscellaneous (4% of sales)	78,120
Total variable costs		1,169,848
Contribution margin		$ 783,152
Fixed Costs
Salaries: manager, chef, brewer	$ 140,000
Maintenance	30,000
Advertising	25,000
Other: cleaning, menus, miscellaneous	40,000
Insurance and accounting	40,000
Property taxes	23,500
Depreciation	94,000
Debt service (interest on debt)	132,000
Total fixed costs		524,500
Operating profit		$ 258,652

Required:

Perform a sensitivity analysis by answering the following questions:

1. What were potential investors and financial institutions concerned with when asking the questions listed in the case?
2. Why was the first financial model prepared by BBC inappropriate for answering most of the questions asked by investors and bankers? Be specific
3. If you were deciding whether to invest in BBC, how would you quickly check the reasonableness of BBC's projected operating profit?
4. Why is it difficult to answer the question: How much does a pint of beer cost to produce