2015 06 01 South Dakota Microbrewery Analysis
South Dakota Microbrewery (SDM) – Case Study Franco Borrello
Key Relevant Information
Product mix: Three different labels: Ale, Stout, Bock.
Market info: Ale label is sold primarily to College bars, in large shipments. Stout and Bock labels are sold to upscale restaurants, in small shipments.
Market forecast: Ale label: High local competition, high price fluctuations. Bock market forecast: Inelastic to small price changes. Low local competition and steady demand.
Gross Margin (GM) target: 30% for all products.
Distribution logistics is considered by SDM management as a key factor to maintain competitiveness and to grow in the future.
Conclusions & Recommendations
Costing methodology: The two different cost allocation methods – Plant-wide cost allocation based on direct labor hours (LHM) and Activity-Based Costing (ABC) – provide substantial different results. These results are shown in Exhibits 1, 2a, and 2b. Due to the characteristics of SDM operations and its cost structure – three different labels, with high incidence of non-labor costs – I recommend to use the ABC method for allocating the overhead costs.
Using the Cost Drivers identified by the SDM accountant, the total costs using the two different methods are (see Exhibit 3 for more information):
Ale
Stout
Bock
Cost per bottle – LHM
$ 0.85
$ 0.86
$ 0.91
Cost per bottle – ABC
$ 0.60
$ 0.88
$ 1.60
GM per batch – ABC
42.7 %
37.3 %
(6.9 %)
Total GM
$ 59,164.59
$ 27,050.88
($ 4,739.47)
Target Price(30% GM)
$ 0.78
$ 1.14
$ 2.08
The company’s overall operating margin is 29.1%, near the management goals. The overall margin does not change if the costing method is changed. An Income Statement for SDM (1998) is shown in Exhibit 4.
Pricing for Ale label: Even if the management is concerned about the lower GM of this label, the ABC costing shows that currently this is the label with higher GM (42.7%), exceeding the management targets (see Exhibit 3). My recommendation is therefore not to change the price of this
Key Relevant Information
Product mix: Three different labels: Ale, Stout, Bock.
Market info: Ale label is sold primarily to College bars, in large shipments. Stout and Bock labels are sold to upscale restaurants, in small shipments.
Market forecast: Ale label: High local competition, high price fluctuations. Bock market forecast: Inelastic to small price changes. Low local competition and steady demand.
Gross Margin (GM) target: 30% for all products.
Distribution logistics is considered by SDM management as a key factor to maintain competitiveness and to grow in the future.
Conclusions & Recommendations
Costing methodology: The two different cost allocation methods – Plant-wide cost allocation based on direct labor hours (LHM) and Activity-Based Costing (ABC) – provide substantial different results. These results are shown in Exhibits 1, 2a, and 2b. Due to the characteristics of SDM operations and its cost structure – three different labels, with high incidence of non-labor costs – I recommend to use the ABC method for allocating the overhead costs.
Using the Cost Drivers identified by the SDM accountant, the total costs using the two different methods are (see Exhibit 3 for more information):
Ale
Stout
Bock
Cost per bottle – LHM
$ 0.85
$ 0.86
$ 0.91
Cost per bottle – ABC
$ 0.60
$ 0.88
$ 1.60
GM per batch – ABC
42.7 %
37.3 %
(6.9 %)
Total GM
$ 59,164.59
$ 27,050.88
($ 4,739.47)
Target Price(30% GM)
$ 0.78
$ 1.14
$ 2.08
The company’s overall operating margin is 29.1%, near the management goals. The overall margin does not change if the costing method is changed. An Income Statement for SDM (1998) is shown in Exhibit 4.
Pricing for Ale label: Even if the management is concerned about the lower GM of this label, the ABC costing shows that currently this is the label with higher GM (42.7%), exceeding the management targets (see Exhibit 3). My recommendation is therefore not to change the price of this