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    Conquistador Beer Solution

    Uploaded by

    Hoa Khanh Nguyen
    The document calculates the demand forecast, fixed costs, unit contribution, and break even volume for Conquistador Beer to determine if investing in the business is viable. Based on an industry demand forecast of 3.1 million gallons and Conquistador's estimated 23% market share, the demand forecast is 713,000 gallons. However, the calculated break even volume is 1,087,900 gallons, so the business is unlikely to break even and the author recommends Larry not invest.

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    Conquistador Beer Solution

    Uploaded by

    Hoa Khanh Nguyen
    351 views12 pages
    The document calculates the demand forecast, fixed costs, unit contribution, and break even volume for Conquistador Beer to determine if investing in the business is viable. Based on an industry demand forecast of 3.1 million gallons and Conquistador's estimated 23% market share, the demand forecast is 713,000 gallons. However, the calculated break even volume is 1,087,900 gallons, so the business is unlikely to break even and the author recommends Larry not invest.

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    The document calculates the demand forecast, fixed costs, unit contribution, and break even volume for Conquistador Beer to determine if investing in the business is viable. Based on an industry demand forecast of 3.1 million gallons and Conquistador's estimated 23% market share, the demand forecast is 713,000 gallons. However, the calculated break even volume is 1,087,900 gallons, so the business is unlikely to break even and the author recommends Larry not invest.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    351 views12 pages

    Conquistador Beer Solution

    Uploaded by

    Hoa Khanh Nguyen
    The document calculates the demand forecast, fixed costs, unit contribution, and break even volume for Conquistador Beer to determine if investing in the business is viable. Based on an industry demand forecast of 3.1 million gallons and Conquistador's estimated 23% market share, the demand forecast is 713,000 gallons. However, the calculated break even volume is 1,087,900 gallons, so the business is unlikely to break even and the author recommends Larry not invest.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 12
    At a glance
    Powered by AI
    The key takeaways are that two methods were used to calculate industry demand, market share was projected to be 23%, and fixed costs included salary, advertising, debt payments, and other expenses.

    Industry demand was calculated in two ways: 1) Using population and per capita beer consumption data and 2) Using tax paid data and extrapolating a straight line growth trend.

    Market share was projected to be 23% based on estimates available in Study C and by applying that percentage to the total industry demand figure.

    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 Industry
    Consumption Demand in 2003
    (gallons)**

    Based on Entire 91000 33.1 gallons 3.02 million


    Population gallons
    Based on 63600 49.6 gallons 3.15 million
    Population Over gallons
    Age 21

    **Assumes straight line growth.


    Calculation of Industry Demand

    • Method 2: Uses Table E.


    “Taxes Paid Approach”
    Taxes Paid (at Gallons
    $.105/ gallon) 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 $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
    Classification Revenue Wholesale Cost Wholesale
    Weight / Gallon Price / Gallon
    Bottles / Cans 3.0 $5.14** $6.4

    Keg 1.0 $2.31 $2.88

    Weighted $4.43 $5.52


    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!

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