Boston Beer

Richard Josano

FNCE 4410

November 8, 2016

Prof. Sand

Problem 1 – Breakeven Analysis

∙ Selling price: $3

∙ Cost of Goods Sold: $1

∙ Operating Expenses: $30,000 per month

∙ Plants, Property & Equipment: $240,000 (PP&E is on the books as of January 1, with a useful life of 10 years)

Assignment: Calculate the number of units the firm needs to sell to break even using two approaches: (1) total revenue - total cost formula, and (2) fixed cost/contribution margin formula.

1. Selling 1 pencil will give a profit contribution of $2 (3-1). And the initial cost to set up the plant is $240,000, which gives the formula to breakeven of just the initial investment of 240,000/2 = 120,000 units sold. And to run the operation for 10 years with a cost of $30,000 per month, which means a total cost to operate 10 years as 120*30,000 = $3,600,000. 3,600,000/2 = 1,800,000 units. The firm will have to sell 120,000 + 1,800,000 = 1,920,000 units over the 10-year period.

X = units

Total revenue – total cost = 0

3(X) – (3,840,000 + X) = 0

X = 1,920,000 units

1. Fixed cost (over 10 years) = 240,000 + 3,600,000 = $3,840,000

Contribution margin per unit = 3 – 1 = 2

 3,840,000/2 = 1,920,000 units.

Problem 2 – Cash Flow & Income Statement

The selling price, material cost, operating expenses, units to breakeven, and PP&E assumptions are all the same as Problem 1, but with the following exceptions/additions:

∙ In order to be in business, you have to buffer one month of inventory on hand at all times. Therefore, since you begin business on January 1, you need to order two months of inventory on January 1, which you pick up COD.