One case of Pale Ale per unit Selling price $25 current volume 26,000 cases (24

Question

One case of Pale Ale per unit Selling price   $25 current volume 26,000 cases (24 beers in a case) malts $2.60 hops $2.40 yeast $0.50 packaging $5.00 *other production costs $4.50 *5 gallons of water for every gallon of beer, CO2, utilities, taxes shipping $1.75 selling $1.25 total variable costs $18.00 total fixed up to 28,000 capacity Salary brewer $1.15 $30,000.00 Salalry driver $0.77 $20,000.00 rent $1.92 $50,000.00 truck $0.92 $24,000.00 promotion exp $0.19 $5,000.00 total costs $22.96 3 It seems like the summer is not a good time for our richer craft beers. Our sales have been dropping to only 30% of our normal volume.   Consequently, we are considering closing the breweru for June, July and August. If we close the brewery, the rent will continue at the regular rate, but the brewer likes to go to Cape Cod and agreed to be paid only 70% of his salary.   The driver will be temporarily laid off but all other fixed expenses will remain unchanged. If we close the brewery for the three summer months, will net income go up or down and by how much? (DROP OR KEEP A SEGMENT) One case of Pale Ale per unit Selling price   $25 current volume 26,000 cases (24 beers in a case) malts $2.60 hops $2.40 yeast $0.50 packaging $5.00 *other production costs $4.50 *5 gallons of water for every gallon of beer, CO2, utilities, taxes shipping $1.75 selling $1.25 total variable costs $18.00 total fixed up to 28,000 capacity Salary brewer $1.15 $30,000.00 Salalry driver $0.77 $20,000.00 rent $1.92 $50,000.00 truck $0.92 $24,000.00 promotion exp $0.19 $5,000.00 total costs $22.96 3 It seems like the summer is not a good time for our richer craft beers. Our sales have been dropping to only 30% of our normal volume.   Consequently, we are considering closing the breweru for June, July and August. If we close the brewery, the rent will continue at the regular rate, but the brewer likes to go to Cape Cod and agreed to be paid only 70% of his salary.   The driver will be temporarily laid off but all other fixed expenses will remain unchanged. If we close the brewery for the three summer months, will net income go up or down and by how much? (DROP OR KEEP A SEGMENT)

Explanation / Answer

3) As the sales have been dropping to only 30% of our normal volume, so the is closing the breweru for June, July and August,

Net Income / Loss if the production take place at 30% during the summer session ie. June - August =

(Sales volume of normal sale for three months * reduced sale %age * contribution per unit) - Normal fixed costs

=( 26000 * 3/12 * 0.30 * $7 ) - ($129000 * 3 /12) = 13650 - 32250 = - $18600 loss

The reduction in the Net Income will be equal to the fixed cost pertaining to the three months - June to August, if the breweru is closed for three months.

As there is no production during the three months, so the contibution from the operation is $0, but as the plant has been temporary shut down for the three month, so the fixed cost incurred $25000 during the three month would be the lose towards Net Income for the year to the company.

So, dropping for the product for three months will cost a loss of $25000

To keep the segment for the three months will cost a loss of $18600.

Thus, it is better to keep the segment on move and do not drop.

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Fixed expense : calculation Fixed costs for the three months Salary brewer $30000 * 3 / 12 * 0.70 $5250 Rent $50000 * 3 / 12 $12500 Salary driver $0 being temporary $0 truck $24000 * 3 / 12 $6000 Promoter expense $5000 * 3 / 12 $1250 Total fixed cost incurred during the three months= $25000

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