Question

Three entrepreneurs were looking to start a new brewpub near Sacramento, California, called Roseville Brewing Company (RBC). Brewpubs provide two products to customers—food 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	$	716,400
Food sales		995,000
Other sales		278,600
Total sales	$	1,990,000
Less cost of sales		515,012
Gross margin	$	1,474,988
Less marketing and administrative expenses		1,011,300
Operating profit	$	463,688

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 $150,000? To make $530,000?
• 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 (36% of total sales)	$	716,400
Food sales (50% of total sales)		995,000
Other sales (14% of total sales)		278,600
Total sales				$	1,990,000
Variable Costs
Beer (12% of beer sales)	$	85,968
Food (35% of food sales)		348,250
Other (29% of other sales)		80,794
Wages of employees (21% of sales)		417,900
Supplies (1% of sales)		19,900
Utilities (3% of sales)		59,700
Other: credit card, misc. (2% of sales)		39,800
Total variable costs				$	1,052,312
Contribution margin				$	937,688
Fixed Costs
Salaries: manager, chef, brewer	$	132,000
Maintenance		24,000
Advertising		19,000
Other: cleaning, menus, misc		38,000
Insurance and accounting		35,000
Property taxes		14,000
Depreciation		87,000
Debt service (interest on debt)		125,000
Total fixed costs				$	474,000
Operating profit				$	463,688

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 $150,000? $530,000?

(Round intermediate calculations to 3 decimal places and your final answer to the nearest whole dollar.)

Answer 1

CALCULATION OF BREAK EVEN IN DOLLARS FIXED COST (A) CONTRIBUTION MARGIN (B) TOTAL SALES (C) CONTRIBUTION MARGIN RATIO=CONTRIBUTION MARGIN/ SALES CONTRIBUTION MARGIN RATIO (D) =(B/C) 474,000.00 937,688.00 1,990,000.00 47% BREAK EVEN IN DOLLARS = FIXED COST/ CONTRIBUTION MARGIN RATIO (E) = (A)/(D) 1,005,942.28 MARGIN OF SAFETY = ( ACTUAL SALES - BREAK EVEN SALES)/ ACTUAL SALES ACTUAL SALES (A) BREAK EVEN SALES AS CALCULATED ABOVE) (B) 1,990,000.00 1,005,942.28 MARGIN OF SAFETY ((A-B) / A) 49%

SALES FOR DESIRED PROFIT = (FIXED COST DESIRED PROFIT) / CONTRIBUTION MARGIN RATIO FIXED COST DESIRED PROFIT SALES VALUE FOR DESIRED PROFIT 474,000.00 150000 1327659.57 (474000+150000)/47% SALES FOR DESIRED PROFIT (FIXED COST + DESIRED PROFIT) / CONTRIBUTION MARGIN RATIO FIXED COST DESIRED PROFIT SALES VALUE FOR DESIRED PROFIT 474,000.00 350000 1753191.489 (474000+350000)/47%