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 Food sales Other sales Total sales Less cost of sales Gross margin Less marketing and administrative expenses Operating profit $ 886,500 965, 300 118,200 $1,970,000 458,025 $1,511,975 1,009,900 $ 502,075 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 $170,000? To make $410,000? • 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.

Answer 1

Solution:

(a) What is Break-Even Point sales in RBC

The break-even point is the sales volume at which sales revenue equals total cost i.e Variable cost + Fixed cost.

In other words, neither a profit nor a loss is made at this point.

Sales - ( Variable Cost + Fixed Cost) = Zero Profit

We have two formula to calculate Break-Even Point (BEP);

Fixed Cost BEP (Units) = Contribution Per Unit

Fixed Cost BEP (Value) = Profit/Volume Ratio

In the question sales units is not given so will apply the second formula to calculate Break-Even Point

We need two things to calculate Break-Even Point;

Fixed cost and Profit-volume ratio-

Fixed Cost = $ 478000

Profit Volume Ratio = ?

Now we calculate Profit Volume Ratio

Profit_Volume Ratio = Contribution Sales

$ 980075 Profit_Volume Ratio = 10

Profit-Volume Ratio = 0.4975

Fixed Cost BEP (Value) = Profit/Volume Ratio

$ 478000 BEP(Value) = * 0.4975

BEP Sales (Value)= $ 960804

Hence Break-Event Point sales in RBC is $ 960804

Verification of answer;

Sales - ( Variable Cost + Fixed Cost) = Zero Profit

$960804 - (960804*0.5025 + $ 478000) = 0

(b) What is the margin of Safety for RBC?

The margin of safety is the difference between the total sales revenue and sales at the break-even point.

Hence the formula for the margin of safety is;

Margin of Safety = Total sales - Sales at Break-Even Point

Total Sales = $ 1970000

Sales at Break-Even Point as calculated above = $ 960804

Therefore,

Margin of Safety = $ 1970000 - $ 960804

= $ 1009196

(c) What sales dollar would be required to achieve an operating profit of $ 170000? $410000?

We use the following formula to calculate sales volume for the desired amount of profit

Sales for Desired Profit = Fixed Cost + Desired Profit Profit Volume Ratio

Sales Dollar for an operating profit of $ 170000

Fixed Cost = $ 478000

Operating Profit = $ 170000

Profit-Volume Ratio = 0.4975

Sales for an operating profit of $ 170000 = $ 478000 + $ 170000 0.4975

= $ 1302512.56

Sales Dollar for an operating profit of $ 410000

Fixed Cost = $ 478000

Operating Profit = $ 410000

Profit-Volume Ratio = 0.4975

Sales for an operating profit of $ 410000 = $ 478000 + $ 410000 0.4975

= $ 1784924.62

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