South Delaware Coors, Inc. Proforma Income Statement
South Delaware Coors, Inc. Proforma Income Statement
Revenues /Sales: Estimated revenues are computed by using a combination of study A, B, C, and I.
Revenues are computed as follows: per capita consumption (41.9) * population (160.85) * market share (.083) = total estimated gallons sold (559.388 thousand). Case/bottle beer accounts for 75% of consumption and keg beer accounts for 25% of consumption. Thus, 419.54 thousand gallons are from case/bottle beer while 139.85 thousand gallons come from keg beer.
Wholesale price per gallon for bottle/can beer is calculated to be $7.65. We are using $4.32 for the wholesale six-pack price because a perceptual map analysis indicated that Coors, Budweiser, and Miller Lite are positioned similarly in consumers’ minds. Study I shows both Budweiser and Miller Lite pricing at $4.32 for a wholesale six-pack. The wholesale gallon price is obtained by multiplying $4.32 with 1.77 to obtain $7.65.
Wholesale price per gallon for keg beer is estimated to be $3.45 ($7.62 * 0.45) as the case context states that keg beer prices at 45% of the price of bottled beer.
Total estimated revenues for case/bottle product: 419.54 thousand gallons * $7.65/gallon = $3,209,580. Total estimated revenues for keg product: 139.85 thousand gallons * $3.45/gallon = $482,483. Total estimated revenues for all Coors beer products = $3209580 + $482483 = $3,691,963.
per capita consumption: We used 41.9 gallons/person which is the per capita consumption of population over age 21 in the Delaware area. We chose Delaware data instead of US National data because this is the state where the distributorship will obtain its sales. We chose the ‘over age 21’ data because this accurately represents the potential market for the Coors market and does not take into account illegal underage consumption. population:
We used 160.85 thousand as the population age 21 and over estimate for Kent/Sussex counties as this is a simple average of the 2002 population age 21 and over and 2000 population age 21 and over. ( 164,000 + 157,700 ) / 2 = 160,850. We had to use the simple average method to estimate because the raw data only included 2002 and 2000 figures. market share: We used 8.3% as the market share estimate as study C indicates that was the level of market share for the Coors product in the year 2001.
Cost of Goods Sold: Study F is used to obtain estimated COGS. The study contains a financial data survey of alcohol wholesalers. We estimate COGS by using the survey finding of 77.9% of total sales. We feel the RMA data serves as a good proxy for this estimate as it contains fairly accurate information from actual wholesalers in the industry. COGS = .779 * $3691963 = $2,876,039.
Sales Expenses: The case provides information that Larry estimates total salaries to be $160K spread across four sales personnel, a secretary, and a warehouse manager. We are assuming that the sales expenses will be $100K for the four sales people, and the remaining $60K will be allocated to the secretary and warehouse manager salary as part of administrative salaries in the SGA section of the income statement. The relatively low salaries for the salespeople can be attributed to the fact that sales jobs usually pay a low fixed base plus incentive compensation as Larry describes.
Administrative Salaries: As described above, a total of $60K has been allocated to the secretary and warehouse manager, consisting of a breakdown of $20K to the secretary and $40K to the warehouse manager.
Depreciation on buildings and equipment: Total allocated to this item is $50K. Equipment depreciation ($35K) and warehouse depreciation ($15K) are both estimated by Larry.
Interest Expense: Larry fails to take into account two asset types that would materially affect the required investment and hence interest expense. These two asset types are cash and accounts receivable. By examining study F, we see that both these asset types usually account for 25.9% of total assets. Using a simple equation consisting of .741x = $800,000, where x denotes the total amount of investment required, we find x = $1,079,622. Assuming that Larry finances the entire investment with a bank loan at an interest rate of 5%, the total interest expense would be $1079622 * .05 = $53,981.
Property taxes and insurance: Total allocated is $20,000 as Larry estimates Insurance to cost $10,000 per year and property taxes also at $10,000 per year.
Other administrative expenses: A total of $20,000 has been allocated for this line item, consisting of maintenance ($5600), utilities/telephone ($12,000), and miscellaneous ($2,400).
We are very pleased with our purchase decision regarding the exploratory research needed to compile the proforma income statement. We were allocated a total budget of $15,000, and spent approx. $6,500 for the reports. Due to the scarcity of resources and the need for effective decision making, we feel that the reports provided us adequate information to fully complete the income statement while staying under budget. While the statement does contain quite a few assumptions and proxy calculations, we believe it will serve as an effective roadmap for Larry in assessing whether he should implement his Coors distributorship business plan.
The income statement implies that first year net profit before taxes is approx. $500K, which is quite significant considering it is 50% of total investment. The payback period under this model would be approx. 2 years, assuming that revenue and cost figures do not change. A more accurate income statement could have been generated if we were given additional information such as the appropriate classification of beer excise taxes, office rents, the cost of refrigeration equipment, etc.