Reference no: EM133085817

Question - 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.

Sales

Beer sales $799,500

Food sales 984,000

Other sales 266,500

Total sales $2,050,000

Less cost of sales 481,750

Gross margin $1,568,250

Less marketing and administrative expenses 1,080,500

Operating profit $487,750

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 $180,000? To make $450,000?

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.