Answered: The management of brewery Ipana oy is…

Principles of Cost Accounting

17th Edition

ISBN:9781305087408

Author:Edward J. Vanderbeck, Maria R. Mitchell

Publisher:Edward J. Vanderbeck, Maria R. Mitchell

Chapter10: Cost Analysis For Management Decision Making

Section: Chapter Questions

Problem 14P

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Question

The management of brewery Ipana oy is planning new strategies to increase profit. An alternative tactic for planned contract sales would be to continue the previous sales model and expand the product range.

The purpose would be to launch "Napero IPA" for hipsters to marvel at, the production process of which includes a week's fermentation in a pressurized vessel that mimics the conditions of the seabed. After fermentation, the product is filtered and further matured in a non-pressurized oak vessel to which a handful of juniper berries and a small pinch of sea salt are added.

Starting production would require a €300,000 investment in production equipment. Based on market research, the management of Ipana oy expects the sales volume to be 288,400 liters in the first year, after which the demand is expected to grow at an annual rate of 5.2%. The average selling price is expected to be significantly higher than Ipana IPA, i.e. around €3.77/liter. However, the production process requires significantly more and more expensive raw materials, the costs of which are expected to be around €2.12/liter produced. At start-up, other production-related costs are expected to be around €254,800/year.

The average return on capital requirement is 9.7% in Ipana oy at the time of making the investment decision. The stated prices do not include value added tax, corporate tax is 20%. The commitment of working capital does not need to be taken into account. The life of the production equipment is estimated to be about five years, and it is depreciated during this period, after which it can be assumed that the production equipment is unusable and worthless. In the tasks, we evaluate the profitability of the investment over a five-year period (where the investment is made in year 0, and production is running in years 1-5).

Calculate the minimum price for the new product at which production is profitable. (for the first year)

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