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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 fromthe 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 $727,200 Food sales 929,200

Other sales 363,600

Total sales $2,020,000

Less cost of sales 513,888

Gross margin $1,506,112

Less marketing and administrative expenses 1,123,400

Operating profit $382,712

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 $140,000? 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) $727,200

Food sales (46% of total sales) 929,200

Other sales (18% of total sales) 363,600

Total sales $2,020,000

Variable Costs

Beer (14% of beer sales) $101,808

Food (33% of food sales) 306,636

Other (29% of other sales) 105,444

Wages of employees (24% of sales) 484,800

Supplies (2% of sales) 40,400

Utilities (4% of sales) 80,800

Other: credit card, misc. (2% of sales) 40,400

Total variable costs $1,160,288

Contribution margin $859,712

Fixed Costs

Salaries: manager, chef, brewer $139,000 Maintenance 26,000

Advertising 11,000

Other: cleaning, menus, misc 39,000

Insurance and accounting 34,000

Property taxes 14,000

Depreciation 90,000

Debt service (interest on debt) 124,000

Total fixed costs $477,000

Operating profit $382,712

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 $140,000? $530,000?

A) Breakpoint:

B) Margin of safety:

c) operating profit of 140,000:

operating profit of 530,000:

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