MANAGING COSTS AND PROFITS (MCP) | Case # 7 HORNGROSEN BREWERY

Learning Team # 10 | Justin Vincent Kilayko, April Joanne Sy, Christel Ann Rivera, Michael Angelo Viray

HORNGROSEN CURRENT SALES PRACTICE AND PERFORMANCE

Table 1. Summary of the companys prices and costs

Variable Brewing Fixed Costs, Other Variable

Beer Type Price, $/case
Cost, $/case $/month Cost

Premium 10.5 5.10

10% sales
600,000 + 375,000
commission
Regular 7.40 4.25

Based on the given data above, below is the simplified profit (P) equation (See derivation in APPENDIX):
= . + . ,
Using the above equation and given the additional information that sales of regular beer is twice that of premium beer
(y = 2x), the total number of cases that the company must sell in a month in order to break even is about 318,975
cases coming from 106, 325 cases of premium and 212, 650 cases of regular beers. (See APPENDIX for
calculations).

COMPARATIVE ANALYSIS OF NEW SALES CAMPAIGN AND CURRENT PRACTICE

Given that the total current sales of beer is 350,000 cases per month, the company is evaluating whether it will be more
economical to pursue a campaign costing $80,000 per month to increase premium beer sales by 20% with a
consequent decrease in regular beer sales by 5%. Basing from the results of evaluation in Table 2, it is still more
economical to retain the current practice and not pursue the new campaign because of lower profit even at higher sales
volume of beers. In fact to breakeven from the new campaign, the company would need an additional 14,784 cases to
be sold resulting to a total of 333,759 cases per month. This occurred despite the higher contribution margin of new
campaign ($3.16/case) versus the current ($3.06/case) due to the higher fixed cost of the new campaign ($1,055k)
against the current ($975k) (See APPENDIX for computations).
Table 2. Comparative analysis of current sales performance versus new campaign.

New Campaign @ 350k

Current New Campaign
cases

Premium, cases 116,667 140,000 135,484

Regular, cases 233,333 221,666 214,516
Total Sales Volume, 350,000
350,000 361,666
cases
Profit, $/month 94,834 88,215 51,339
WTD Average CM, 3.16
3.06
$/case
 MANAGING COSTS AND PROFITS (MCP) | Case # 7 HORNGROSEN BREWERY
Learning Team # 10 | Justin Vincent Kilayko, April Joanne Sy, Christel Ann Rivera, Michael Angelo Viray

APPENDIX
A. DERIVATION OF PROFIT EQUATION Alternative solution:
4.35 + 2.41(2) $3.0567
Let x = number of cases of premium beers sold = =
y = number of cases of regular beers sold 1 + (2)
T = total number of cases of beers 975,000
= = 318,975
3.0567
I. NUMBER OF CASES SOLD
EQUATION (N) C. COMPARATIVE ANALYSIS OF CURRENT
AND NEW CAMPAIGN
=+
1 = 1 + 1 = 31 = 350,000 cases
II. REVENUE EQUATION (R):
1 = 116,667 ; 1 = 21 = 233,333
= 10.5 + 7.4
2 = 1.2(116,667)
III. COST EQUATION (C):
2 = 140,000
= (5.1 + 4.25) + 975,000 + 0.1
IV. PROFIT EQUATION (P) 2 = 0.95(233,333)

= 2 = 221,666
= 4.35(140,000) + 2.41(221,666) 975,000 80,000
= [(5.1 + 4.25) + 975,000 + 0.1 ]
= 88,215
= 0.9 [(5.1 + 4.25) + 975,000 ]
D. CONTRIBUTION MARGIN OF NEW
= 4.35 + 2.41 975,000 CAMPAIGN AND ITS BREAKEVEN POINT
B. CALCULATION OF CURRENT PRACTICES 4.35(140,000) + 2.41(221,666)
BREAK EVEN POINT AND CONTRIBUTION =
140,000 + 221,666
MARGIN
or
At break-even point P = 0, y = 2x:
4.35(1.2) + 2.41(0.95)(2)
= 4.35 + 2.41(2) 975,000 =
1.2 + 0.95(2)
= 4.35 + 4.82 975,000 = 9.17 975,000
$3.16097
0 = 9.17 975,000 =

975,000 975,000 + 80,000
= =
9.17 3.16097
= 106,325 = 333,759
= 2 = 2(106,325)

= 212,650

= + = 106,324 + 212,650

= 318,975