Question

1, Calculate the break-even point in number of bottles and sales (before taxes): a) for each beer separately b) for the brewery in total c) Compare your answers in a and b. Explain why the answers are the same or different. 3. Assuming the same production and sales as in requirement 1 what is the brewery's margin of safety in dollars? 4. The brewery is considering a marketing campaign for it's Stout beer. The marketing department prepared the following projections: Advertising cost Projected increase in Stout sales 500 300 bottles 1000 525 bottles 1500 700 bottles 2000 850 bottles Assuming that sales of Lager and Ale remain unaffected by this campaign, what level of marking spending would maximize brewery's after-tax income? Calculate new after-tax income. 

Answer 1

1. Contribution margin statement
XYZ Brewery
Contribution margin statement
	Lager	Ale	Stout	Total
	p.u.	Total	p.u.	Total	p.u.	Total
Sales	2.8	5600	3	6000	4.5	3600	15200
Less: Variable costs
Ingredients	1.49	2980	1.1	2200	1.4	1120	6300
Labor	0.1	200	0.1	200	0.1	80	480
Variable overhead	0.05	100	0.03	60	0.07	56	216
Contribution margin	1.16	2320	1.77	3540	2.93	2344	8204
Less: Fixed costs
Traceable fixed costs		1200		1400		1900	4500
Common fixed costs							3000
Net Income							704
Tax @ 28%							197.12
Net income after tax							506.88
2. Computation of break-even sales:
a. For each beer separately:
	Lager	Ale	Stout	Total
Sales units	2000	2000	800	4800
Sales mix % (A)	42%	42%	17%
Contribution margin per unit (B)	1.16	1.77	2.93
Composite contribution margin per unit (C=A*B)	0.48	0.74	0.49	1.71
Total fixed costs (D)				3000
Break-even units for common fixed costs(E=D/C)				1,755
No of units break-even (F=E*A)	731	731	293	1,755
Traceable fixed costs (G)	1200	1400	1900	4500
Contribution margin per unit (H)	1.16	1.77	2.93
Break-even units for traceable fixed costs(I=F/G)	1034	791	648	2,474
Total break-even units (I/F)	1,766	1,522	941	4,229
Break-even sales (Breakeven units * Sales price)	4,944	4,567	4,235	13,746
b. For brewery in total :
Particulars	Brewery
	Units	Sales
Sales for brewery	15,200	15,200
Contirbution margin for brewery	8204	8,204
No. of units	4800
Contirbution margin for brewery	1.71
Contribution margin % (sales/ contribution margin)		0.54
Total fixed costs	7500	7500
Break-even units (Fixed costs/Contribution margin p.u.)	4,388
Break-even sales (Fixed costs/Contribution margin %.)		13,896
3. Margin of safety in Dollars for Brewery:
Total sales	15,200
Break-even sales	13,896
Margin of safety sales	1,304
4. Computation of maximum after tax income :
	Scenario 1	Scenario 2	Scenario 3	Scenario 4
Advertising costs	500	1000	1500	2000
Increased sales (in bottles)	300	525	700	850
Contribution margin per unit of stout	2.93	2.93	2.93	2.93
Incremental contribution	879	1538	2051	2491
Less: advertising costs	500	1000	1500	2000
Incremental income	379	538	551	491
Ranking	4	2	1	3
XYZ Brewery
New Contribution margin statement
	Lager	Ale	Stout	Total
	p.u.	Total	p.u.	Total	p.u.	Total
Units		2000		2000		1500 (i.e. 800 + 700)
Sales	2.8	5600	3	6000	4.5	6750	18350
Less: Variable costs
Ingredients	1.49	2980	1.1	2200	1.4	2100	7280
Labor	0.1	200	0.1	200	0.1	150	550
Variable overhead	0.05	100	0.03	60	0.07	105	265
Contribution margin	1.16	2320	1.77	3540	2.93	4395	10255
Less: Fixed costs
Traceable fixed costs		1200		1400		1900	4500
Common fixed costs							3000
Advertising costs						1500	1500
Net Income							1255
Tax @ 28%							351.4
Net income after tax							903.6
5. Computation of maximum after tax income:
Maximum no of units to be produced:
	Contribution p.a.	Ranking	Demand (A)	Manufacturing capacity (B)	Lower of A or B
Stout	2.93	1	1800	2000	1800
Ale	1.77	2	3000	2500	2500
Lager *	1.16	3	4000	3000	1700
Total				6000
Since the total manufacturing capacity is 6000, no. of units of lager has been considered as the remaining capacity i.e. total manufacturing capacity of 6000 units less units to be produced of Stout and Ale.
XYZ Brewery
New Contribution margin statement
	Lager	Ale	Stout	Total
	p.u.	Total	p.u.	Total	p.u.	Total
Units		1700		2500		1800
Sales	2.8	4760	3	7500	4.5	8100	20360
Less: Variable costs
Ingredients	1.49	2533	1.1	2750	1.4	2520	7803
Labor	0.1	170	0.1	250	0.1	180	600
Variable overhead	0.05	85	0.03	75	0.07	126	286
Contribution margin	1.16	1972	1.77	4425	2.93	5274	11671
Less: Fixed costs
Traceable fixed costs		1200		1400		1900	4500
Common fixed costs							3000
Net Income							4171
Tax @ 28%							1168
Net income after tax							3003
6. Computation of maximum units to be ordered and cost per unit to be ordered in case of availing the option to outsourcing the manufacturing of Lager beer. Since the maximum demand for the product is 4000 bottles, the Company can order for 4000 units.
Computation of cost per unit
Sales:	11,200
Less: Traceable fixed costs	1,200
	10,000
Less: Margin lost	1,972
	8,028
No. of units to be ordered	4,000
Cost per unit	2.01