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.

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 $290,000? To make $420,000?
• 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.

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 $290,000? $420,000?

Sales Beer sales Food sales Other sales Total sales Less cost of sales Gross margin Less marketing and administrative expenses Operating profit $ 840, 500 984,000 225,500 $2,050,000 533,615 $1,516,385 1,079,500 $ 436,885 $2,050,000 Sales Beer sales (41% of total sales) $840, 500 Food sales (48% of total sales) 984,000 Other sales (11% of total sales) 225,500 Total sales Variable costs Beer (158 of beer sales) $126,075 Food (35% of food sales) 344,400 Other (28% of other sales) 63,140 Wages of employees (248 of sales) 492,000 Supplies (1% of sales) 20,500 Utilities (3% of sales) 61,500 Other: credit card, misc. (1% of sales) 20,500 Total variable costs Contribution margin Fixed Costs Salaries: manager, chef, brewer $137,000 Maintenance 21,000 Advertising 16,000 Other: cleaning, menus, misc 35,000 Insurance and accounting 32,000 Property taxes 24,000 Depreciation 90,000 Debt service (interest on debt) 130,000 Total fixed costs Operating profit $1,128,115 $ 921,885 $ $ 485,000 436,885