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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 program regional 20
University of Washington EMBA ProgramRegional 20

Conquistador Beer Suggested Solution

October 10, 2003

approach to the problem
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
Calculation of Industry Demand
  • Method 1: Uses Tables A and B.

Per capita beer consumption * population

**Assumes straight line growth.

calculation of industry demand4
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 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
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
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 annual8
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
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 contribution10
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
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
Total Research Required…

Exhibits C,E,F, and I for a total cost of

$3,350

And $4,150 left over!