South Delaware Coors Case - Costs Essay Example

The Problem(s). Manson and Associates was doing a research to determine market potential of a Coors beer distributorship for a two-county area in southern Delaware on behalf of Larry Brownlow so Larry could find the answer for the following question: •Does the South Delaware Coors distributorship offer sufficient investment potential given Mr. Brownlow’s current business and personal situation?

Recommendation (s) - south delaware coors case. After doing extensive research, we recommend Larry to pursue the Coors distributorship in southern Delaware. The total investment for the distributorship was estimated to be $800,000. Larry had enough funding to pursue this opportunity by investing $400,000 from his trust fund and made a loan from the bank in the amount of $400,000. It would still leave him with $100,000 from his trust fund for accounts payable and emergency funding. Profit Potential. Table 1 showed the estimated market and sales potential in the projected market area. The market potential was $30,480,234 and the sales potential was $2,712,739. Table 2 showed the estimated average wholesale price/gallon of beer calculation which equals to $4.82. Table 3 showed the calculation of the variable cost/gallon of beer which equals to $3.72. Table 4 showed the estimated fixed cost for both the best and worst case scenarios. The best scenario assumed Larry took $400,000 from his trust fund and made a loan of $400,000 from the bank. The worst case scenario assumed that he took out a loan in a total of $800,000. The loan payment and other expenses were the fixed cost that he failed to take into consideration when estimating the cost. We derived these figures from the financial statement. The total fixed cost for the best case scenario was $374,708 and the fixed cost for the worst case scenario was $421,908.

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Table 5 showed the break even analysis calculation for both the best case and the worst case scenario. The best case scenario showed $340,644 gallon of break even volume, $1,641,904 of break even in dollar sales, and 67.14% break even market share. The volume to break even 340,643 gallons was less than the projected sales volume 5,700,666 gallons. Table 7 showed the total market share 8.9% and the calculation of the sales volumes which equals to $507,359. Table 8 showed the net revenue from the best case scenario to be $183,389 and it was a lost in the worst case scenario which was an unlikely event due to the fact that we adjusted the figures by 4% worse than the best scenario. Entrepreneurship. Larry did not have any experience in the beer distribution business but he had a degree in MBA. Running the business would give him a chance to apply his business knowledge and fulfill his entrepreneur spirit. Besides he did not want to work a 9 to 5 job which would bore him. Product feature. According to survey, Coors was a well-known and well-liked brand. It was a good selling product in the market. It had substantial market momentum and market share. Larry did not have to put too much effort to promote the product.

Table 1. ESTIMATED MARKET AND SALES POTENTIAL IN THE PROJECTED MARKET AREA Market Potential in volume =39.4 * (75,200 + 85,300) = 39.4 * 160,500 = $6,323,700 gallons Market Potential in dollar =6,323,700 * $4.82 = $30,480,234 Sales Potential in volume =6,323,700 * 0.089 = 562,809 gallons Sales Potential in dollar =562,809 * $4.82 = $2,712,739

TABLE 2. ESTIMATED SALES PRICE PER GALLON
Average wholesale price/gallon (bottles and cans) =(3.29 + 3.29 +3.29 +2.57 +3.29 + 2.68 +3.68)/7 =$3.16 Wholesale price/gallon ( 6 –pack bottles and cans)=
$3.16 * 1.77 = $5.59
Wholesale price/gallon (Kegs) =$5.59 * 0.45 = $2.52
Average wholesale price/gallon (6-pack & kegs) =($5.59 * 0.75) + (2.52 * 0.25) =$4.82

Data used for calculation were extracted from Exhibit 1 and Table I from the handout.  TABLE 3. ESTIMATED VARIABLE COSTS
Variable Cost
Cost of Goods Sold/gallon =77.1% of wholesale price/gallon Variable cost/gallon of 6- pack =$5.59 * 0.771 = $4.31
Variable cost/gallon of kegs =$5.59 * 0.771 * 0.45 = $1.94
Average variable cost/gallon of 6-pack and kegs =(0.75)($4.31) + (0.25)($1.94) = $3.72 Data were extracted from Exhibit 1 in the handout and Table 2 in this document.
TABLE 4. ESTIMATED FIXED COSTS
Fixed Cost (Best Case Scenario)
Salaries$160,000
Other fixed or semifixed expenses
Equipment depreciation$35,000
Warehouse depreciation 15,000
Utilities and telephone 12,000
Insurance 10,000
Personal property taxes 10,000
Maintenance and janitorial 5,600
Miscellaneous 2,400 90,000
Loan interest and payment 14,800
Other expense net 109,908
Total $374,708
Data were extracted from text book p137. The best case scenario assumes Larry invest $400,000 from his trust fund and got a line of credit from the bank in the amount of $400,000. His short term loan payment is 3.7%. The load payment per year is $400,000 * 0.037 = $14,800. . The Income data from Table F indicates that there is a 0.4% of all other expenses net out of the total sales which equals to $109,908 (5,700,666 gallons * $4.82 *0.4%) .

TABLE 4.1 ESTIMATED FIXED COSTS
Fixed Cost (Worst Case Scenario)
Salaries$160,000
Other fixed or semifixed expenses
Equipment depreciation$35,000
Warehouse depreciation 15,000
Utilities and telephone 12,000
Insurance 10,000
Personal property taxes 10,000
Maintenance and janitorial 5,600
Miscellaneous 2,400 90,000
Loan interest and payment 62,000
Other expenses net 109,908
Total$421,908
Data were extracted from text book p137. The fixed cost is assumed that
Larry has discovered the other fixed cost incurred. The total investment is $800,000. The worst case scenario assumes that Larry got a total line of credit from the bank in the amount of $400,000 and invested $400,000 from other source. The Notes payable – short term and the long-term debt is (11.8 + 3.7) = 15.5 % from Table F in the handout. The Loan interest and payment per year is ($400,000 * 0.155)= $62,000. The Income data from Table F indicates that there is a 0.4% of all other expenses net out of the total sales which equals to $109,908 (5,700,666 gallons * $4.82 *0.4%) . TABLE 5. BREAK EVEN ANALYSIS (Best Case Scenario)

Break even volume =$374,708 / ($4.82 – $3.72) = 340,643 gallons = 340,644 gallons Break even in dollar sales= $4.82 * 340,644 = $1,095,455.86 = $1,641,904 Break even in market share =
Break even volume/Market Served size 340,644 gallons / (5,700,666 gallons * 0.089) = 340,644 gallons / 507,359 =0.6714 = 67.14%

TABLE 5.1. BREAK EVEN ANALYSIS (Worst Case Scenario)
Break even volume =$ 421,908 / ($4.63 – $3.87) = 555,142 gallons Break even in dollar sales= $4.63 * 555,142 = $ = $2,570,307 Break even in market share =555,142 gallons / (507,359) = 1.09 = 109%

In the worst case scenario, we assume there is a 5% fluctuation in unit sale price and unit variable cost. Unit sale price reduced by 4% = 4.82 * 0.96 = 4.63 . Unit variable cost increased by 4% = 3.72 * 1.04 = $3.87.

TABLE 6. HISTORIC BEER WHOLESALE VOLUME
1997 total market sales in gallon =
$(40,300 + 31,680 + 40,320 + 83,520 + 60,480 + 31,680)/$0.06 = $287,980 / $0.06 = 4,799,666.6 gallons = 4,799,667 gallons
1998 total market sales in gallon =
$(42,840 + 33,660 + 42,840 + 88,740 + 64,260 + 33,660)/$0.06 = $306,000 /$0.06 = 5,100,000 gallons
2000 projected total market sales in gallon =
5,100,000 + (5,100,000 – 4,799,667) * 2 = 5,700,666 gallons Data extracted
from Table C in the handout. Demand = Tax paid/tax per gallon. Year 2000 sales projection assumes that the same grow rate continues for two years from 1998.

TABLE 7. PROJECTED SALES VOLUME
Total market share for year 2000 =8.9%
Estimated sales volume = Market demand * Market Share5,700,666 gallons * 0.089 = 507,359 gallons Data extracted from Table C in the handout and Table 6 in this document.

TABLE 8. BEST CASE VS. WORST CASE SCENARIO
Best CaseWorst Case
Unit Price$4.82$ 4.63
Fixed Costs$374,708$421,908
Variable Costs$3.72$3.87

Break even volume$340,644$555,142
Break even sales$1,641,904$2,570,307

Demand$5,700,666$5,472,639
Market Share8.9%8.9%
Sale Volume507,359gallons487,064 gallons

Sales Revenue$2,445,472$2,255,106
Total Costs$2,262,083$2,306,845
Net Revenue$183,389(51,739)

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