Managerial Accounting

Managerial Accounting
Case #3
ArizonaMicrobrewery,Inc.
In 2009,David Stott quithis job at alargebeer companyto start his own brewery, Arizona Microbrewery,Inc. (AMI). His familysupported his decision and investedin thebusiness alongwith David. AMIstarted operations on January10, 2010 and produces fourlabels of specialtybeers (SaguaroPaleAle, BisbeeBock, Ocotillo AmberPilsner and SedonaStout). An explanation ofthebeermakingprocess is shown in AppendixA.

In muchoftheUnited States (includingArizona),beeris sold in a “three-tier”system. Underthis system, beeris manufactured byproducers, sold to distributors who then sell to retailers (suchas liquor stores, drugstores,grocerystores, etc.). David employs two salespeoplewho receiveafixed monthly salaryplus an 8%commission. All beeris sold in cases of24 bottles to beerdistributors (primarilyin the Southwestern United States). Product salesand cost information for2013 is shown in Exhibit 1 with additional information in Exhibit 2. David rents afacilitywhich is used to makethebeer, arefrigeration areato storethebeer andasmall officearea. AMIbreweryhas5 machines with 9,300 total machinehours availableperyearto producebeer(assumingtheyremain on oneshift with somenormal maintenance, breaks,etc.). Whilethereis an emptyspacein thefacilitythat could beused to expand the beeroperations, the companywould need to purchase an additionalgrainhopper and brewhousefor about $100,000 (the current watersystem and process control system could be expanded to handlethe new machine). As discussed in AppendixA, beers areaged in arefrigeration areapriorto sale. The current refrigeration unitallows fordifferent temperatures in different areasoftheunit and theunit is usuallyrunningabout 80% full. Keepingtherefrigeration unit somewhat full helps reducerefrigeration costs. Additionally, sincethe companyis so new,sales havebeengrowing but erratic(from 2010 to2011, sales growth was over45%; however, from2012 to 2013, sales growth was only12%). Thus, keepingmorebeeron hand allows the companyto meet the erraticdemand without loss ofsales.

David has not taken asalarysincethebusiness started. Whilethebusiness has beengenerating asmall profit, David has been reinvestingearnings back into thebusiness. Hewants to grow thebusiness to generatemoreprofit forhim and forhis family. David has been consideringincreasingthepriceon SedonaStout to $29.00 per case. Hethinks that,with this priceincrease,unit sales will decreaseto3,750 cases peryear. However, this would reducetotal Stout revenues from $110,876 to $108,750. Alternatively, David could drop thepriceofSedonaStout to $25 per case. Based on his market research, hethinks that this will result in sales increasingto 4,700 cases. Heis leaningtowards this alternative as this will increaseStout revenuesfrom $110,876 to $117,500.

Whilethe companyhas some cash on hand, neitherthe companynorDavid’s familyhave another$100,000 to invest in thebusiness right now. Sincethebusiness is new andhas been showingonlysmall profits, David has not been abletogetaloan to expand thebusiness. Instead, David wants to fully utilizethemachines theyhave (with 9,300 total machinehoursavailableduringtheyear).In 2013, they used alittleover8,300 machinehours (as shown in Exhibit 1). David wants to keep producingand sellingall fourproduct lines as manyofthebeerdistributors likebuying from breweries with several different beers. However, hewants to direct thesalespeopleto emphasizeacertain product when they areout talkingwith beerdistributors. Given the current machinesetup, David is not surewhat beer product lineto tell thesales peopleto emphasizeto maximizehis profits.

Finally,David and his familylove root beer. Root beer followsasomewhatsimilarprocess to beerin that theingredients aremixed togetherto form a”culture”that thengoes throughfermenting, filtering and filling. Root beerwould not need to beaged or stored in the refrigerator.Thereis anemptyareainthe current microbrewery facilitythatcould bededicated to makingroot beer. As a result, David has been talkingwith his family about producingand sellingalineofspecialtyrootbeer. Root beerwould beproduced ondifferent machinery. David’s sisterknows someonewho isgettingout ofthesodabusiness and would bewilling to sell them themachineryneeded to makethe root beer for$8,000. Basedon market research hehas done, David thinks that he could charge$16.50 per caseof root beer.Basedon thesame research healso thinks that he could sell between 3,000and 12,000 cases ofroot beerwith likelysales ofabout 6,000 cases.Root beer could besold to someofhis current distributors. However, soda does not need to be sold through the three-tier system required for alcohol sales. Therefore, much ofroot beer sales would bedirectly to upscalegroceries such asLaGrandeOrangeGroceryand Pizzeriain Phoenixand Whole Foods andAJ’s Fine Foodswith locations throughout Arizona. David could producetheroot beerin-houseorout-source production. David has talked with another companywhocould producethe root beer forAMIusing David’s recipe andAMI could sell it as theirbrand (this option is referred to as “privatelabel”). It could bepurchased from this other companyfor$13.05per case. AMIwould still need to incursomevariable handlingcosts and someminor fixed costs. Alternatively, AMIcould producethe root beerin house.

SeeExhibit 3 for estimated cost information.
QUESTIONS

You havebeen hiredas aconsultant to help David with thebusiness. Please address the following questions in preparation for your discussions with David.

1. Ignore anycurrent plans. Usinglastyear’s actualdata and sales mix, how manytotal cases would David need to sell in orderto earn $50,000 aftertax? How manyofthesecases would beOcotillo AmberPilsner?

2. In question one,you identified thetotal numberofcases the companyneeds tosell to earn $50,000 after tax(and how manycases for each product line). Assumeyou did thecalculations in question one correctly. However, beforediscussingyoursolution with theowner, identify and explain at least threeissues related to your analysisand the assumptions employed in your analysis in question 1(discuss each concern; what it is and whyit is a concern; do NOT just question general facts ofthe casesuch as whywe are chargingso little foroneproduct or another).

3. Refer to the original data. David has a few options regarding SedonaStout pricing: a) keepthe sales price thesame (no change),b) increasethesales priceor3) decreasethe sales price. What would you recommend hedoand why? Provide both quantitative and qualitative analysis.

4. Next, ignoringtheSedonaStout information, considerDavid’s question regardingwhat product linethesales people should emphasize. David wants thesales efforts to maximizeprofits and utilize the company’s current capacity. What wouldyoutell him?Explainyour rationale.

5. Analyzingthesales forecast of root beer, what preliminarycourseofactiondoyou recommend (in- houseorout-sourceproduction) and why?Supportyourrecommendation with numbers.

6. What other issues, concerns or further analysis do you want to discuss with David? Your issues/concerns could pertain to the out-sourcing decision as well as whether AMI should add root beer as a new product line. The issues/concernsshould includeboth numeric and non-numericissues. Do NOT justbulletpointallkindsofitems;instead,talkaboutspecificsand how theyrelate tothiscompany/situation and whyitisimportant to consider.

 
Beer MakingProcess
Beeris theoverall genericterm forfermented malt beverages. There areonlytwo kinds ofbeer– ales and lagers. Within thosetwo broad categories there aremanystyles. Majoralestylesarepale ale,IPA, porter, stout, and barleywine. Amongthemajorlagerstyles arepilsner, Märzen, bock, and dunkles(dark lager). AMImakes twoales (Saguaro PaleAleand SedonaStout) and two lagers (Ocotillo Amber Pilsner and BisbeeBock).

It is theyeast that is asignificant differencebetween the aleand thelager.Aleyeasts coagulateloosely at thetop ofthe fermentation tank. Given thetypeofyeast, alesferment best between 64 to 70 degrees Fahrenheit.Lageryeasts aremoresuccessful at coldertemperatures, typically50 to 55 degrees Fahrenheit and coagulatecloserto thebottom ofthe fermentation tank.Lageryeasts also tend to ferment moreaggressively, leavingbehind lessresidual sweetness andflavorthanales.

DIRECTMATERIALS:Beerprimarilyconsists of4 ingredients: water,barley, hops andyeast. A clarifyingagent is also used in thebeermakingprocess. Thedifferent types ofbeerrequiredifferent proportions oftheseingredients and even slightlydifferent ingredients (e.g.PaleAleuses apalemalted barleywhileStout is madeusingadarker roastedbarley.).

BREWING PROCESS: Work in thebreweryis typicallydivided into 8 steps: Mashing,Lautering, Boiling,Fermenting, Conditioning, Filtering, Fillingand Aging.

Mashing: Mashingis the first process in brewing. Thebarleygrains aremixed with water. This mixtureis heated up withrests at certain temperatures to allow enzymes in themalt to break down the starch in thegrain into sugars.

Lautering: Lauteringis theseparation ofthe extracts obtained duringmashingto createWort.Lautering has two stages: first Wort run-off, during which the extract is separated in an undiluted state from the spent grains, and spargingin whichextract whichremains with thegrains is rinsed offwith hot water. The result ofthis process is adark, sugarheavyliquid called Wort.

Boiling: BoilingtheWort ensures its sterilityandprevents infection. Duringtheboil, hops are added, which contributetheirbitterness, aroma and flavorcompounds to thebeer.Theboil must be conducted so that it is even and intense. Theboil lasts between 60 and 120 minutes, dependingon its intensity,the hop addition schedule and thevolumeofWort expected to evaporate. The Wort is then cooled before fermentation.

Fermenting &Conditioning:Fermentation starts as soon asyeast is added to the cooled wort. This is also thepoint at which theproduct is first called beer.It is duringthis stagethat fermentablesugarsare metabolized into alcohol and carbon dioxide (thebubbles in beer).As notedabove, fermentation temperatures areverydifferent for ales versus lagers.

When thesugars in the fermentingbeerhavebeenalmost completelydigested, the fermentation slows down and theyeast cellswill naturallystart to dieoff and begin to settletowards thebottom ofthetank at an accelerated rate. AtAMI, the fermentation tanks have coolingjackets on them. Therefore, conditioningcan takeplacein thesametankas fermentation.

Beer MakingProcess(Continued)

Filtering:Filteringthebeerstabilizes flavor, andgives beerits shine.Filters removemuch oftheyeast and anysolids (e.g. hops,grain particles)left in thebeer.

Filling: (a.k.a. “packaging”)is puttingthebeerinto thebottles in which it will leavethebrewery. At this point, carbon dioxideis infused in thebottlingprocess to increasethecarbon dioxidein thebeer. Cases ofbeer (consisting of24 bottles) arethen put into aging.

Aging: Beeris stored (aged or”lagered”)in therefrigeratorunit and thetemperature and length ofthe agingwill varybased onthetypeofbeer. Ales areusuallyaged no morethan a few weeks. Theaging process isgenerallydoneat 40 to 55 degreesFahrenheit.Lagers aresimilarlyaged but at much lower temperatures, 32 to 45 degreesFahrenheit, and foramuch longertimetypicallymonths. This is called lageringand creates a cleaner, clearerbeer. The refrigeration unit allows fordifferent temperatures in differentareas oftheunit.

2013COST&SALESINFORMATION

PerCaseInformation:
Ocotillo
Saguaro Bisbee Amber Sedona

SalesPricepercase PaleAle
$ 21.00 Bock
$ 24.50 Pilsner
$ 23.50 Stout
$ 26.50 Total

DirectMaterialspercase 2.75 2.90 3.15 4.00
DirectLaborpercase 3.75 3.75 3.00 5.25
VariableOverheadpercase 5.90 6.18 6.10 6.34
TotalVCpercase 12.40 12.83 12.25 15.59
ContributionMarginperCase $ 8.60 $ 11.67 $ 11.25 $ 10.91
Casessoldlastyear 12,593 7,126 6,827 4,184 30,730

DLHpercase
0.25
0.25
0.20
0.35
TotalDLHlastyear 3,148.25 1,781.50 1,365.40 1,464.40 7,759.55

MHpercase
0.20
0.40
0.25
0.30
TotalMH lastyear 2,518.60 2,850.40 1,706.75 1,255.20 8,330.95

 

ContributionMargin IncomeStatement:
Ocotillo
Saguaro
PaleAle Bisbee
Bock Amber
Pilsner Sedona
Stout
Total
Sales $264,453.00 $174,587.00 $160,434.50 $110,876.00 $710,350.50
VariableCosts 156,153.20 91,426.58 83,630.75 65,228.56 396,439.09
ContributionMargin 108,299.80 83,160.42 76,803.75 45,647.44 313,911.41
DirectFixedCosts 10,329.62 8,392.91 6,017.39 9,893.92 34,633.84
SegmentMargin $97,970.18 $74,767.51 $70,786.36 $35,753.52 $279,277.57
CommonFixedCosts $245,389.44
OperatingIncome $33,888.13
Taxes(35%) 11,860.85
NetIncome $22,027.28

ADDITIONALCOSTINFORMATION

 
Detailsof TotalVC
DirectMaterials $ 93,537.20
DirectLabor 116,393.25
ProductionSupplies 26,064.41
Variableportionof Maintenance 40,892.55
Variableportionof Utilities 27,610.57
VariableOfficeSupplies(salesforms,etc) 3,493.88
Shippingcosts 31,619.19
8%SalesCommission 56,828.04
TotalVariablecosts $396,439.09
Detailsof TotalFixedCosts(directandindirect)BrewMaster/QualityControlmanager

60,293.15
Receivingand Shippingdepartmentexpenses 22,511.32
Depreciation 11,712.10
Facilitycosts(rent,taxes,insurance,etc) 78,938.15
Advertising& Marketingcosts 22,994.91
Fixedportionof Maintenance(includingIT support) 9,992.98
Fixedportionof Utilities(includingrefrigeration) 10,390.37
Fixedportionof OfficeSupplies 4,305.66
FixedSalaryof Salespeople 32,221.81
Administrativestafftoassistowner 26,662.83
TotalFixedCosts $280,023.28

ROOTBEER COST INFORMAITON

 

Alternative1-ProduceIn-House
DirectMaterialspercase 1.75
DirectLaborpercase 2.25
VariableOverheadpercase 3.60
TotalVariablecostspercase 7.60

AdditionalFixedcosts(peryear) $ 37,640
(These are recurring costs and does not include the purchase of the machine)

 
Alternative2- OutsourceProduction
Purchasepricepercase 13.05
VariableOverheadpercase 0.10
TotalVariablecostspercase 13.15

AdditionalFixedcosts(peryear) $ 6,000

PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET AN AMAZING DISCOUNT 🙂