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. 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 PopulationPer Capita Beer Consumption (gallons)** Industry Demand in 2003 Based on Entire Population gallons3.02 million gallons Based on Population Over Age gallons3.15 million gallons **Assumes straight line growth.

Calculation of Industry Demand Method 2: Uses Table E. “Taxes Paid Approach” Taxes Paid (at $.105/ gallon) Gallons Consumed 1999$234, million 2000$253, million 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 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 ClassificationRevenue Weight Wholesale Cost / Gallon Wholesale Price / Gallon Bottles / Cans3.0$5.14**$6.4 Keg1.0$2.31$2.88 Weighted Average $4.43$5.52 **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 $1.09 ($ $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!