Conquistador Case Solution
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 Consumption (gallons)** 33.1 gallons 49.6 gallons Industry Demand in 2003 3.02 million gallons 3.15 million gallons
Based on Entire Population Based on Population Over Age 21
91000 63600
**Assumes straight line growth.
Calculation of Industry Demand
• Method 2: Uses Table E. “Taxes Paid Approach”
Taxes Paid (at $.105/ gallon) Gallons Consumed
1999
2000
$234,200
$253,650
2.23 million
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,
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 Consumption (gallons)** 33.1 gallons 49.6 gallons Industry Demand in 2003 3.02 million gallons 3.15 million gallons
Based on Entire Population Based on Population Over Age 21
91000 63600
**Assumes straight line growth.
Calculation of Industry Demand
• Method 2: Uses Table E. “Taxes Paid Approach”
Taxes Paid (at $.105/ gallon) Gallons Consumed
1999
2000
$234,200
$253,650
2.23 million
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,