Fall 2015 – ACCN-7140 Exercise Sheet #1b -South Dakota Microbrewery, Inc.

QUESTION

Fall 2015 – ACCN-7140 Exercise Sheet #1bSouth Dakota Microbrewery, Inc.CVP and Constrained ResourcesIn 2004, Sandy Dowth quit her job at a large beer company to start her own brewery. She namedthe new brewery South Dakota Microbrewery, Inc. (SDM). SDM started operations on June 1,2004 and produces four labels of specialty beers (Australian Ale, South Dakota Bock, ArizonaAmber and Sedona Stout). All beer is sold to distributors in cases. Product sales and costinformation for 2007 is included in the table below. You are the controller for the company andneed to answer the following questions for Sandy (see next page).Existing Products:AustralianAleSouthDakota BockArizonaAmberSedonaStoutTotalSales Price per case $ 21.00 $ 23.50 $ 21.00 $ 28.50Direct Materials per case 3.05 3.10 3.30 3.51Direct Labor per case 3.81 3.53 3.04 3.65Variable Overhead percase 5.50 5.73 6.08 10.44Variable costs per case 12.36 12.36 12.42 17.60Cases sold last year 14,832 10,120 6,588 4,260 35,800Total revenues last year $ 311,472 $ 237,820 $ 138,348 $ 121,410 $ 809,050Machine Hour per case 0.20 0.40 0.25 0.30Total Machine Hours lastyear 2,966.40 4,048.00 1,647.00 1,278.00 9,939.40Other Items:Direct (product line) fixedcosts $ 54,433.44 $ 38,648.28 $ 26,681.40 $ 29,655.99 $ 149,419.11Common fixed costs – notallocated $ 75,000.00Tax Rate 35%2Requirements:1. What was operating profit by product line and total net income in 2007? Show the segmentedincome statement for 2007, that means, include columns for each product line as well as the“Total” column. Using the current income statement answer these questions:a. What is the CM per unit of each product line and on average?b. What is the CM Ratio of each product line and on average?c. What is the sales mix by product line (percentage proportion) in units?d. What is the sales mix by product line (percentage proportion) in revenues?2. Assuming the sales mix remains the same,a. What do total revenues need to be for Sandy to earn $250,000 after taxes? (Note: use theWACMR approach. Recall that the CMR computed from the Total column form part 1 isa weighted average.)b. What amount of revenues must each product line make in order to earn $250,000 aftertaxes? (Note: using the WACMR approach, the allocation must be based on the originalproportion of revenues, not units.)Each of the following scenarios is independent. That is, they refer back to the originalcomputations in part 1 for comparisons.3. Sandy is considering increasing prices on Sedona Stout to $30 per case. She thinks that thiswill result in a 15% decrease in units sold of Sedona Stout and ALSO believes that ArizonaAmber unit sales will increase by 10%. Should she pursue this plan? Why or why not?4. BuyNow marketing has approached Sandy about advertising on the radio. They have told herthat she could purchase $40,000 of advertising and increase sales (in units) of each productline by 15%. Assuming that BuyNow’s estimates are correct, should she pursue thisopportunity? Why or why not? Use the shortest way to find an answer to this question andonly fill the cells of the table that you think are necessary.5. SDM only used 9,939.40 machine hours last year and has 10,200 available machine hours.Therefore, Sandy has unused machine hours totaling 260.6 MH. She would like to fullyutilize the machines and use up the remaining 260.6 MH to maximize her income. She wantsto continue producing and selling what she currently sells. Additionally, if she producedthem, she believes that she could sell an additional 500 cases of each product. How wouldyou advise Sandy to “spend” the remaining MH? By how much would your plan increase thecompany-wide operating profit?31.AustralianAleSouth DakotaBockArizonaAmber Sedona Stout TotalSales $ 311,472 $ 237,820 $ 138,348 $ 121,410 $ 809,050Variable CostsContribution Margin (CM)Direct (product line) fixedcosts $ 54,433.44 $ 38,648.28 $ 26,681.40 $ 29,655.99 $ 149,419.11Product line operatingprofitCommon Fixed Costs $ 75,000.00Company-wide operatingprofitTaxesNet IncomeCM/caseCM ratioSales Mix (in cases)Sales Mix (in dollars)2.AustralianAleSouth DakotaBockArizonaAmber Sedona Stout TotalSalesContribution Margin (CM)Direct (product line) fixedcostsProduct line operatingprofitCommon Fixed CostsCompany-wide operatingprofitTaxesNet Income $ 250,00043.AustralianAleSouth DakotaBockArizonaAmber Sedona Stout TotalCases sold 14,832 10,120Sales $ 311,472 $ 237,820Variable CostsContribution Margin (CM)Direct (product line) fixedcosts $ 54,433.44 $ 38,648.28 $ 26,681.40 $ 29,655.99 $ 149,419.11Product line operatingprofitCommon Fixed Costs $ 75,000.00Company-wide operatingprofitTaxesNet Income? Net Income4.AustralianAleSouth DakotaBockArizonaAmber Sedona Stout TotalSalesVariable CostsContribution Margin (CM)Direct (product line) fixedcosts $ 54,433.44 $ 38,648.28 $ 26,681.40 $ 29,655.99 $ 149,419.11Product line operatingprofitCommon Fixed CostsCompany-wide operatingprofitTaxesNet Income? Net Income55.AustralianAleSouth DakotaBockArizonaAmber Sedona Stout Total

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