David is determined to make $50,000 after tax. After listening to your advice, he makes a radical choice: discontinuing the pro

ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 31, No. 4 DOI: 10.2308/iace-51189 November 2016 pp. 409–415

Arizona Microbrewery, Inc.: An Instructional Case on Management Decision Making

Janet A. Samuels Arizona State University

Kimberly M. Sawers Seattle Pacific University

ABSTRACT: This case provides students with an opportunity to utilize cost volume profit (CVP) analysis tools in a contextually rich environment of a microbrewery. The case explores basic CVP concepts as well as decision making

for constrained resources, make versus buy, and new product development. Further, the case requires quantitative

analysis, understanding, and exploration of contextual issues as well as assessment of qualitative factors. While

directed at graduate students (M.B.A. and E.M.B.A.) in a managerial accounting course, this case may also be

suitable for undergraduate students with some minor modifications.

Keywords: cost volume profit (CVP); breakeven, target profit; ‘‘what if’’ analysis; constrained resources; make versus buy; add a product line.

THE CASE

I n 2009, David Tucker quit his job at a large beer company to start his own brewery, Arizona Microbrewery, Inc. (AMI).

His family supported his decision and invested in the business along with David. AMI began operations on January 10,

2010 and now produces four labels of specialty beers (Saguaro Pale Ale, Bisbee Bock, Ocotillo Amber Pilsner, and

Sedona Stout). An explanation of the beer-making process is shown in Appendix A.

In much of the United States (including Arizona), beer is sold in a ‘‘three-tier’’ system. Under this system, beer is manufactured by producers, sold to distributors, who then sell to retailers (such as liquor stores, drug stores, and grocery

stores). David employs two salespeople who receive a fixed monthly salary plus an 8 percent commission. All beer is sold to

beer distributors ( primarily in the Southwestern United States) in cases of 24 bottles. Product sales and cost information for

2013 are shown in Exhibit 1 with additional information in Exhibit 2. David rents a facility that is used to make the beer, a

refrigeration area to store the beer, and a small office area. AMI brewery has five machines with 9,300 total machine hours

available per year to produce beer (assuming AMI remains on one shift with some normal maintenance, breaks, etc.). While

there is an empty space in the facility that could be used to expand the beer operations, the company would need to purchase an

additional grain hopper and brew house for about $100,000 (the current water system and process control system could be

expanded to handle the new machine). As discussed in Appendix A, beers are aged in a refrigeration area prior to sale. The

current refrigeration unit allows for different temperatures in different areas of the unit and the unit is usually running about 80

percent full. Keeping the refrigeration unit somewhat full helps reduce refrigeration costs. 1

Additionally, since the company is

so new, sales have been growing but erratic (from 2010 to 2011, sales growth was over 45 percent; however, from 2012 to

2013, sales growth was only 12 percent). Thus, keeping more beer on hand allows the company to meet the erratic demand

without loss of sales.

We thank the editor, associate editor, and two reviewers for their helpful suggestions for improving the manuscript.

Editor’s note: Accepted by Lori Holder-Webb.

Submitted: February 2015 Accepted: June 2015

Published Online: June 2015

1 Opening and closing the refrigeration unit when it is very empty results in a greater temperature drop as more warm air gets into the refrigeration unit compared to when the refrigeration unit is very full; thus, keeping the refrigeration unit somewhat full helps reduce refrigeration costs.

409

David has not taken a salary since the business started. While the business has been generating a small profit, David has

been reinvesting the earnings in the business. He wants to grow the business to generate more profit for his family and himself.

David has been considering increasing the price on Sedona Stout from $26.50 per case to $29.00 per case. He thinks that, with

this price increase, unit sales will decrease from 4,184 cases to 3,750 cases per year. However, this would only reduce total

annual Stout revenues to $108,750 from $110,876. Alternatively, David could drop the price of Sedona Stout to $25 per case.

This is much closer to the Bock price as well as the Pilsner. Based on his market research, he thinks that this will result in Stout

sales increasing to 4,700 cases per year. He is leaning toward this alternative as this will increase Stout revenues from $110,876

to $117,500 per year.

While the company has some cash on hand, neither the company nor David’s family have another $100,000 to invest in the

business right now for a new grain hopper and brew house. Since the business is new and has been showing only small profits,

David has not been able to get a loan to expand the business. Instead, David wants to fully utilize the machines they already

have. In 2013, they used a little over 8,300 machine hours (as shown in Exhibit 1) and the existing five machines have a total of

9,300 machine hours available during the year (assuming normal maintenance and some repairs needed during the year). Thus,

the existing machines have approximately 1,000 additional hours available for use. David wants to keep producing and selling

all four of his product lines because many of the beer distributors like buying from breweries that offer several different beers.

EXHIBIT 1

2013 Cost and Sales Information

Panel A: Per Case Information

Saguaro Pale Ale

Bisbee Bock

Ocotillo Amber Pilsner

Sedona Stout Total

Sales Price $21.00 $24.50 $23.50 $26.50

Direct Materials per case 2.75 2.90 3.15 4.00

Direct Labor per case 3.75 3.75 3.00 5.25

Variable Overhead per case 5.90 6.18 6.10 6.34

Total Variable Cost per case 12.40 12.83 12.25 15.59

Contribution Margin per Case $8.60 $11.67 $11.25 $10.91

Cases Sold last year 12,593 7,126 6,827 4,184 30,730

Direct Labor Hours per case 0.25 0.25 0.20 0.35

Total Direct Labor Hours last year 3,148.25 1,781.50 1,365.40 1,464.40 7,759.55

Machine Hours per case 0.20 0.40 0.25 0.30

Total Machine Hours last year 2,518.60 2,850.40 1,706.75 1,255.20 8,330.95

Panel B: Contribution Margin Income Statement

Saguaro Pale Ale

Bisbee Bock

Ocotillo Amber Pilsner

Sedona Stout Total

Sales $264,453.00 $174,587.00 $160,434.50 $110,876.00 $710,350.50

Variable Costs 156,153.20 91,426.58 83,630.75 65,228.56 396,439.09

Contribution Margin $108,299.80 $83,160.42 $76,803.75 $45,647.44 $313,911.41

Direct Fixed Costs 10,329.62 8,392.91 6,017.39 9,893.92 34,633.84

Segment Margin 97,970.18 $74,767.51 $70,786.36 $35,753.52 $279,277.57

Common Fixed Costs 245,389.44

Operating Income $33,888.13

Taxes (35%) 11,860.85

Net Income $22,027.28

410 Samuels and Sawers

Issues in Accounting Education Volume 31, Number 4, 2016

However, he wants to direct the salespeople to emphasize a certain product when they are out talking to the beer distributors.

Given the current machine availability, David is not sure what beer product line to tell the sales people to emphasize in order to

maximize his profits.

Finally, David and his family love root beer. Root beer follows a somewhat similar process to beer in that the ingredients are

mixed together to form a ‘‘culture’’ that then goes through fermenting, filtering, and filling. Root beer would not need to be aged or

stored in the refrigerator. There is an empty area in the current microbrewery facility that could be dedicated to making root beer.

As a result, David has been talking with his family about producing and selling a line of specialty root beer. Root beer would be

produced using different machinery rather than the existing five beer machines. David’s sister knows someone who is getting out

of the soda business and would be willing to sell the used machinery needed to make the root beer for $8,000. Based on market

research he has done, David thinks that he could charge $16.50 per case of root beer. Based on the same market research, there is a

lot of uncertainty in how many cases of root beer the company could sell. David is less familiar with the root beer market and there

is a wide range in sales of specialty root beer in the local groceries. Based on his understanding of the market, he thinks he could

sell between 3,000 and 12,000 cases of root beer per annum with likely sales of about 6,000 cases.

Root beer could be sold to some of his current distributors. However, soda does not need to be sold through the three-tier

system that is required for alcohol sales. Therefore, much of root beer sales would be directly to upscale groceries such as La

Grande Orange Grocery and Pizzeria in Phoenix and Whole Foods and AJ’s Fine Foods with locations throughout Arizona. David

could produce the root beer in-house or out-source the production. David has talked with another company who could produce the

root beer for AMI using David’s recipe and AMI could sell it as their brand (this option is referred to as ‘‘private label’’). It could

be purchased from this other company for $13.05 per case. AMI would still need to incur some variable handling costs and some

minor fixed costs. Alternatively, AMI could produce the root beer in house. See Exhibit 3 for estimated cost information.

CASE REQUIREMENTS

You have been hired as a consultant to help David with the business. Please address the following questions in preparation

for your discussions with him.

EXHIBIT 2

Additional Cost Information

Panel A: Details of Total Variable Costs

Direct Materials $93,537.20

Direct Labor 116,393.25

Production Supplies 26,064.41

Variable Portion of Maintenance 40,892.55

Variable Portion of Utilities 27,610.57

Variable Office Supplies (sales forms, etc.) 3,493.88

Shipping Costs 31,619.19

8% Sales Commission 56,828.04

Total Variable Costs $396,439.09

Panel B: Details of Total Fixed Costs (Direct and Indirect)

Brew Master/Quality Control Manager $60,293.15

Receiving and Shipping Department Expenses 22,511.32

Depreciation 11,712.10

Facility Costs (rent, taxes, insurance, etc.) 78,938.15

Advertising and Marketing Costs 22,994.91

Fixed Portion of Maintenance (including IT support) 9,992.98

Fixed Portion of Utilities (including refrigeration) 10,390.37

Fixed Portion of Office Supplies 4,305.66

Fixed Salary of Salespeople 32,221.81

Administrative Staff to Assist Owner 26,662.83

Total Fixed Costs $280,023.28

Arizona Microbrewery, Inc.: An Instructional Case on Management Decision Making 411

Issues in Accounting Education Volume 31, Number 4, 2016

1. Ignore any current plans. Using last year’s actual data and sales mix, how many total cases would David need to sell in

order to earn $50,000 after tax? How many of these cases would be Ocotillo Amber Pilsner?

2. In Question 1, you identified the total number of cases the company needs to sell to earn $50,000 after tax (and how

many cases of Ocotillo Amber Pilsner). Assume you did the calculations in Question 1 correctly. However, before

discussing your solution with the owner, identify and explain at least three issues related to your analysis and the

assumptions employed in your analysis in Question 1 (discuss each concern; what it is and why it is a concern; do not just question general facts of the case such as why AMI is charging a certain price for one product or how AMI can

reduce direct material cost).

3. Ignore the desire to earn $50,000 after tax and refer to the original data. David has a few options regarding Sedona Stout

pricing: (a) keep the sales price the same (no change), (b) increase the sales price, or (c) decrease the sales price. What

would you recommend he do and why? Provide both quantitative and qualitative analysis.

4. Next, ignoring the Sedona Stout information, consider David’s question regarding what product line the sales people

should emphasize. David wants their sales efforts to maximize profits and utilize the company’s current capacity. What

would you tell him? Explain your rationale.

5. Analyzing the sales forecast for root beer, what preliminary course of action do you recommend (in-house or out-source

production) and why? Support your recommendation with numbers.

6. What other issues, concerns, or further analysis do you want to discuss with David? Your issues/concerns could pertain to

whether AMI should add root beer as a new product line and, if so, the issues or concerns of producing in-house versus out-

sourcing. The issues/concerns should include both numeric and non-numeric issues. Do not just bullet point all kinds of items; instead, talk about specifics and how they relate to this company/situation and why they are important to consider.

APPENDIX A

Beer-Making Process

Beer is the overall generic term for fermented malt beverages. There are only two kinds of beer: ale and lager. Within those

two broad categories there are many styles. Major ale styles are pale ale, India Pale Ale (IPA), porter, stout, and barleywine.

Among the major lager styles are pilsner, Märzen, bock, and dunkles (dark lager). AMI makes two ales (Saguaro Pale Ale and

Sedona Stout) and two lagers (Ocotillo Amber Pilsner and Bisbee Bock).

It is the yeast that is the significant difference between the ale and the lager. Ale yeasts coagulate loosely at the top of the

fermentation tank. Given the type of yeast, ales ferment best between 64 to 70 degrees Fahrenheit. Lager yeasts are more

successful at colder temperatures, typically 50 to 55 degrees Fahrenheit and coagulate closer to the bottom of the fermentation

tank. Lager yeasts also tend to ferment more aggressively, leaving behind less residual sweetness and flavor than ales.

EXHIBIT 3

Root Beer Cost Information

Panel A: Alternative 1—Produce In-House

Direct Materials per case $1.75

Direct Labor per case 2.25

Variable Overhead per case 3.60

Total Variable Costs per case $7.60

Additional Fixed Costs ( per year) $37,640.00

These are recurring costs and do not include the initial purchase cost of the machine.

Panel B: Alternative 2—Out-Source Production

Purchase price per case $13.05

Variable Overhead per case 0.10

Total Variable costs per case $13.15

Additional Fixed costs ( per year) $6,000.00

412 Samuels and Sawers

Issues in Accounting Education Volume 31, Number 4, 2016

Direct Materials

Beer primarily consists of four ingredients: water, barley, hops, and yeast. A clarifying agent is also used in the beer- making process. The different types of beer require different proportions of these ingredients and even slightly different ingredients (e.g., pale ale uses a pale malted barley while stout is made using a darker roasted barley).

Brewing Process

Work in the brewery is typically divided into eight steps: Mashing, Lautering, Boiling, Fermenting and Conditioning, Filtering, Filling, and Aging.

Mashing

Mashing is the first process in brewing. The barley grains are mixed with water in a large vessel. This mixture is heated with periodic breaks, or rests, at certain temperatures to allow enzymes in the malted grains to break down the starch in the grain into sugars.

Lautering

Lautering is when the mash is separated into a liquid and the residual grain. There are two stages to lautering. In the first stage, called Wort Run-Off, a liquid (or extract) is separated in an undiluted form from the used grains. The second stage is called sparging. During sparging, the extract that remains with the grains is rinsed off with hot water. The results of these two stages are combined and the result is a dark, sugary liquid called Wort. This is returned to the original Mashing vessel.

Boiling

Boiling the Wort in the vessel ensures that the mixture is sterile and prevents infection. During the boiling step, hops are added to the Wort. The hops contribute bitterness, aroma, and flavor compounds to the beer. The boiling must be continuous and intense (rolling boil) and typically lasts between 60 and 120 minutes, depending on its intensity, when the hops are added and the amount of Wort expected to evaporate. The Wort is then cooled before the fermentation stage.

Fermenting and Conditioning

The cooled Wort is put into a fermentation tank and yeast is added, which starts the fermentation process. This is also the point at which the product is first called beer. It is during this stage that fermentable sugars are metabolized into alcohol and carbon dioxide (the bubbles in beer). As noted above, fermentation temperatures are very different for ales versus lagers.

Fermentation takes about a week. When the sugars in the fermenting beer have been almost completely digested, the fermentation

slows down and the yeast cells will naturally start to die off and begin to settle to the bottom of the tank. At AMI, the fermentation

tanks are equipped with cooling jackets. Therefore, conditioning can take place in the same tank as fermentation. Conditioning (also

called ‘‘maturation’’) is when beer is cooled in the tanks to allow the yeast to settle to the bottom of the tank. Conditioning allows the flavor of the beer to become smoother and is a natural filtration process (removing cloudy material from the beer).

Filtering

The beer that comes out of the fermentation tank must be filtered prior to bottling. Filtering the beer stabilizes flavor and gives beer its gloss or ‘‘shine.’’ Filtering removes much of the yeast and any solids (e.g., hops and other grain particles) that remain in the beer.

Filling

The filling process (also called ‘‘packaging’’) is putting the beer into the bottles in which it will leave the brewery. At this point, carbon dioxide is added to the bottling process to increase the carbon dioxide in the beer. Cases of beer (consisting of 24 bottles) are then put into aging.

Aging

Beer is stored (aged or ‘‘lagered’’) in the refrigerator unit and the temperature and length of the aging will vary based on the type of beer. Ales are usually aged no more than a few weeks. The aging process is generally done at 40 to 55 degrees Fahrenheit. Lagers

are similarly aged but at much lower temperatures, 32 to 45 degrees Fahrenheit, and for a much longer time (typically months).

Lagering creates a cleaner, clearer beer. The refrigeration unit allows for different temperatures in different areas of the unit.

Arizona Microbrewery, Inc.: An Instructional Case on Management Decision Making 413

Issues in Accounting Education Volume 31, Number 4, 2016