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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.
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University of Washington EMBA ProgramRegional 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. • Demand Forecast = Industry Demand * Market Share for Conquistador Beer • BEV = Fixed Costs / (Price – Variable Costs)
Calculation of Industry Demand • Method 1: Uses Tables A and B. Per capita beer consumption * population **Assumes straight line growth.
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.
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
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
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
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
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.
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)
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!!
Total Research Required… Exhibits C,E,F, and I for a total cost of $3,350 And $4,150 left over!