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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 $ 789,200
Food sales 1,085,150
Other sales 98,650
Total sales $ 1,973,000
Less cost of sales 530,738
Gross margin $ 1,442,262
Less marketing and administrative expenses 1,128,430
Operating profit $ 313,832

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 $220,000? To make $520,000?
  • 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 (40% of total sales) $ 789,200
Food sales (55% of total sales) 1,085,150
Other sales (5% of total sales) 98,650
Total sales $ 1,973,000
Variable Costs
Beer (15% of beer sales) $ 118,380
Food (35% of food sales) 379,803
Other (33% of other sales) 32,555
Wages of employees (25% of sales) 493,250
Supplies (1% of sales) 19,730
Utilities (3% of sales) 58,890
Other: credit card, miscellaneous (2% of sales) 39,260
Total variable costs 1,141,868
Contribution margin $ 831,132
Fixed Costs
Salaries: manager, chef, brewer $ 135,500
Maintenance 30,200
Advertising 20,200
Other: cleaning, menus, miscellaneous 40,200
Insurance and accounting 41,000
Property taxes 24,200
Depreciation 95,000
Debt service (interest on debt) 131,000
Total fixed costs 517,300
Operating profit $ 313,832

Required:

Perform a sensitivity analysis by answering the following questions:

  1. What is the break-even point in sales dollars for RBC?
  2. What is the margin of safety for RBC?
  3. What sales dollars would be required to achieve an operating profit of $220,000? $520,000?

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What is the break-even point in sales dollars for RBC? Note: Round intermediate calculations to 3 decimal places and your final answer to the nearest whole dollar. What is the margin of safety for RBC? Note: Round intermediate calculations to 3 decimal places and your final answer to the nearest whole dollar. What sales dollars would be required to achieve an operating profit of $220,000?$520,000? Note: Round intermediate calculations to 3 decimal places and your final answers to the nearest whole dollar

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