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	$	769,600
Food sales		1,185,600
Other sales		124,800
Total sales	$	2,080,000
Less cost of sales		524,576
Gross margin	$	1,555,424
Less marketing and administrative expenses		1,086,200
Operating profit	$	469,224

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 $120,000? To make $450,000?

• 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 (37% of total sales)	$	769,600
Food sales (57% of total sales)		1,185,600
Other sales (6% of total sales)		124,800
Total sales				$	2,080,000
Variable Costs
Beer (14% of beer sales)	$	107,744
Food (32% of food sales)		379,392
Other (30% of other sales)		37,440
Wages of employees (21% of sales)		436,800
Supplies (2% of sales)		41,600
Utilities (5% of sales)		104,000
Other: credit card, misc. (1% of sales)		20,800
Total variable costs				$	1,127,776
Contribution margin				$	952,224
Fixed Costs
Salaries: manager, chef, brewer	$	132,000
Maintenance		29,000
Advertising		17,000
Other: cleaning, menus, misc		32,000
Insurance and accounting		38,000
Property taxes		16,000
Depreciation		93,000
Debt service (interest on debt)		126,000
Total fixed costs				$	483,000
Operating profit				$	469,224

Required:

e. Perform a sensitivity analysis by answering the following questions:

1. What is the break-even point in sales dollars for RBC? (Round intermediate calculations to 3 decimal places and your final answer to the nearest whole dollar.)

2. What is the margin of safety for RBC? (Round intermediate calculations to 3 decimal places and your final answer to the nearest whole dollar.)

4. What sales dollars would be required to achieve an operating profit of $120,000? $450,000? (Round intermediate calculations to 3 decimal places and your final answers to the nearest whole dollar.)

Answer 1

Required 1:

Break-even point in sales Dollars = $ 1,055,046 (Rounded )

Explanation:

Break-even point in sales Dollars = Total Fixed Costs / Contribution margin ratio

Contribution margin ratio = Contribution margin / Total Sales

contribution margin ratio = $ 952,224 / $ 2,080,000

contribution margin ratio = 45.78 %

Total Fixed costs = $ 483,000 (Given )

Break-even point in sales Dollars = Total Fixed Costs / Contribution margin ratio

Break-even point in sales Dollars = $ 483,000 / 45.78 %

Break-even point in sales Dollars = $ 1,055,046 (Rounded )

Required 2 :
Margin of Safety = $ 1,024,954
Explanation :
To Calculate the Margin of safety for RBC :
Particulars	Amount($)
Total Sales	$ 2,080,000
Less: Break even point in sales Dollar	($1,055,046)
Margin of Safety	$ 1,024,954

Required 4 :

Sales Dollars to achieve Operating Profit = ( Total Fixed costs + Operating Profit ) / Contribution margin ratio

Total Fixed costs = $ 483,000 (Given )

Contribution margin ratio = Contribution margin / Total Sales

contribution margin ratio = $ 952,224 / $ 2,080,000

contribution margin ratio = 45.78 %

For Operating Profit $ 120,000 :

Sales Dollars to achieve Operating Profit $120,000 = ($483,000 + $ 120,000 ) / 45.78 %

Sales Dollars to achieve Operating Profit $120,000 = $ 1,317,169 (Rounded )

For Operating Profit $ 450,000 :

Sales Dollars to achieve Operating Profit $450,000 = ($483,000 + $ 450,000 ) / 45.78 %

Sales Dollars to achieve Operating Profit $120,000 = $ 2,038,008 (Rounded )