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!