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# University of Washington EMBA Program Regional 20

University of Washington EMBA Program Regional 20. Conquistador Beer Suggested Solution October 10, 2003. Approach to the Problem. Calculate a Demand Forecast for the Company. Then calculate Break Even Volume and compare them. Télécharger la présentation ## University of Washington EMBA Program Regional 20

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1. University of Washington EMBA ProgramRegional 20 Conquistador Beer Suggested Solution October 10, 2003

2. Approach to the Problem • Calculate a Demand Forecast for the Company. Then calculate Break Even Volume and compare them. • Demand Forecast = Industry Demand * Market Share for Conquistador Beer • BEV = Fixed Costs / (Price – Variable Costs)

3. Calculation of Industry Demand • Method 1: Uses Tables A and B. Per capita beer consumption * population **Assumes straight line growth.

4. Calculation of Industry Demand • Method 2: Uses Table E. “Taxes Paid Approach” Assuming a straight line growth, demand will be 3.07 million gallons in 2003.

5. Market Share Projection • Market Share Estimates are available in Study C. We estimate 23% market share in 2003. Demand Forecast = 23% * 3.1 million gallons =713,000 gallons

6. Investments • The investments given in the case (Table A) fail to include estimates of cash and accounts receivable. Table F provides an estimate of the percentage of total assets needed at 16.3% \$1,589,000 / (1-.163) = \$1,898,447

7. Fixed Cash Flows (Annual) • The case (Table B) does not include: • Salary expense and benefits. Estimate that 10% of total compensation is in the form of incentives, and 30% is in non-salary benefits. \$425,000/(1-.1)*(1/(1-.3)) = \$674,603 • Advertising. Assume cost is 3% of sales 713,000*.03*\$6.40 = \$136,896 (note: price will be discussed later) • Debt retirement / interest. Assume 20 year loan at 8%. Larry borrows \$1,548,000 (\$1,898,447 - \$350,000 that he invests). Recurring payment of \$155,526 per year • Travel and other related expenses: \$40,000/year

8. Fixed Cash Flows (Annual) Depreciation is not a cash flow, and therefore should not be included. The revised fixed costs are as follows: Utilities and Telephone \$46,000 Insurance \$112,000 Property Taxes \$18,000 Marketing / Co-op Advertising \$136,896 Debt Retirement and Interest Payments \$155,526 Travel and Related Expenses \$40,000 TOTAL \$1,183,025

9. Unit Contribution Price can be estimated using Exhibit I. We assume that Conquistador is a premium beer, and can sell at a wholesale price equal to the average price of the top three beers listed (\$3.61 for a 6-pack). This translates into \$6.40 / gallon (128 ounces per gallon, 12 ounces per beer). In addition, kegs will be sold at a rate of 1/3 the gallons of bottles and cans. Price for kegs is 45% of bottle/can price.

10. Unit Contribution **The wholesale cost is calculated by multiplying the cost of goods sold (which from Exhibit F is 80.3% of sales) by the price per gallon. Unit contribution is therefore \$1.09 (\$5.52 - \$4.43)

11. Break Even Volume BEV = Fixed Costs / Unit Contribution = \$1,183,025 / \$1.09 = 1,087,900 gallons Our demand forecast was 713,000 gallons. We will most likely not break even. Larry should probably not invest in this business!!

12. Total Research Required… Exhibits C,E,F, and I for a total cost of \$3,350 And \$4,150 left over!

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