University of Washington EMBA Program Regional 20

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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

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

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!