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:
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 $550,000?
- 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:
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.)
Break-even point:
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.)
Margin of safety:
4. What sales dollars would be required to achieve an operating profit of $140,000? $550,000? (Round intermediate calculations to 3 decimal places and your final answers to the nearest whole dollar.)
Sales Beer sales Food Sales Other sales Total sales Less cost of sales Gross margin Less marketing and administrative expenses Operating profit 812,000 1,177,400 40,600 $2,030,000 497,756 $1,532,244 1.100.300 431,944