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
Population
Per Capita Beer
Consumption
(gallons)**
Industry
Demand in 2003
91000
33.1 gallons
3.02 million
gallons
Based on
63600
Population Over
Age 21
49.6 gallons
3.15 million
gallons
Based on Entire
Population
**Assumes straight line growth.
Calculation of Industry Demand
• Method 2: Uses Table E.
“Taxes Paid Approach”
Taxes Paid (at
$.105/ gallon)
Gallons
Consumed
1999
$234,200
2.23 million
2000
$253,650
2.41 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
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
Insurance
Property Taxes
Marketing / Co-op Advertising
Debt Retirement and Interest Payments
Travel and Related Expenses
$46,000
$112,000
$18,000
$136,896
$155,526
$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
Classification
Revenue
Weight
Wholesale Cost Wholesale
/ Gallon
Price / Gallon
Bottles / Cans
3.0
$5.14**
$6.4
Keg
1.0
$2.31
$2.88
$4.43
$5.52
Weighted
Average
**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!