2. Table of Contents
Contents
Consultant Introduction______________________________________________________________________ 1
Kolsch Executive Consulting.....................................................................................................................1
Education ..................................................................................................................................................1
Experience ................................................................................................................................................1
Introduction _______________________________________________________________________________ 2
Company Introduction ...............................................................................................................................2
Objectives..................................................................................................................................................2
Potential Problems ....................................................................................................................................3
Financial Analysis __________________________________________________________________________ 5
Net Present Value .....................................................................................................................................5
Internal Rate of Return..............................................................................................................................6
Financial Statements.................................................................................................................................6
Cost-Volume-Profit Analysis .....................................................................................................................6
Cost Classification (Account Analysis)___________________________________________________7
Break-even Analysis ________________________________________________________________7
Margin of Safety ____________________________________________________________________9
Market Analysis___________________________________________________________________________ 10
SWOT......................................................................................................................................................10
PEST.......................................................................................................................................................10
Price ........................................................................................................................................................10
Alternatives ______________________________________________________________________________ 11
Alternative 1 – Do Not Sell Bottled Beer or Wine....................................................................................11
Alternative 2 – Do Not Open Restaurant ................................................................................................11
Alternative 3 – Purchase Used Brewing System ....................................................................................12
Recommendations ________________________________________________________________________ 13
3. Table of Contents
Appendix A ______________________________________________________________________________ 14
Depreciation ............................................................................................................................................14
Weighted-Average Contribution*.............................................................................................................14
Pessimistic Cost-Volume-Profit Analysis ................................................................................................15
Optimistic Cost-Volume-Profit Analysis ..................................................................................................16
Projected Financial Statements ..............................................................................................................17
Appendix B ______________________________________________________________________________ 18
Alternative 1 Pessimistic Cost-Volume-Analysis.....................................................................................18
Alternative 2 Pessimistic Cost-Volume-Profit Analysis ...........................................................................19
Alternative 3 Pessimistic Cost-Volume-Profit Analysis ...........................................................................20
Alternative 2 Projected Income Statement..............................................................................................21
4. Pg. 01 Consultant Introduction
Consultant Introduction
Kolsch Executive Consulting
Kolsch Executive Consulting is the top-rated consultant company in Ontario. Founded in 1960, by Max Kolsch;
Kolsch Executive Consulting has been working within the start-up industry for over fifteen years. Kolsch
Executive is also an active member within the community, working with co-op students from the Richard Ivey
School of Business.
Education
Max Kolsch studied Business at McGill University, receiving a Bachelor of Commerce with a major in Economics
and a minor in Marketing. In addition, Max received a certificate in Craft Beer and Brewing Essentials from Simon
Fraser University, as he has a passion for craft brewing.
Experience
Kolsch Executive has worked with many start up companies and largely established companies throughout
Canada. Some of the larger companies Kolsch has offered consulting services to is John Labatts Ltd. and
Molson’s, helping them research and launch new product lines.
5. Pg. 02 Introduction
Introduction
Company Introduction
Brothers, Robert and Alex Keller are considering the prospect of opening a brew pub in Ontario known as
“Kellers’ Freehouse”. The Keller’s have a total of $200,000 to invest. Their current plans involve brewing their
own line of craft beer and operating a brewpub, complete with a proper restaurant. They will need a building
large enough to house their Fluestien Brewing Systems, a kitchen, and a dining area and bar for customers.
The Keller’s plan to be active within the company and expect to draw $50,000 yearly as their own personal
salaries ($25,000 each). In addition, they are planning to hire a kitchen manager, a brewmaster, kitchen-staff,
and wait-staff.
Objectives
The Keller’s have identified three objectives for their venture:
1. Generate enough profit to compensate a salary of $25,000 each.
When evaluating the Keller’s objectives, we have used a pessimistic sales revenue of $550,000, and an
optimistic revenue of $750,000 (from industry standards). When reviewing the pessimistic value, the
Keller’s would have a net loss only within their first year of operation, but would never be able to pay
their annual salaries of $50,000, as their retained earnings would slowly decrease every year after year
one. If we are to look at the optimistic revenue, the Keller’s would be able to cover their annual salaries
by the end of year three and would have an annual net income of $139,162 by the end of year two.
Please see the projected income statements in Appendix A (page 17) for reference.
2. Provide a return on investment comparable to similar risk investments.
We have compared the investment of Kellers’ Freehouse with a Mutual Fund at a 10% rate of return.
Within five years, the Mutual Fund would appear to be the better investment; however, at the 10-year
mark, the Kellers’ Freehouse investment would have a marginally higher rate of return and becomes the
more profitable investment. Therefore, Kellers’ Freehouse would provide a return on investment
comparable to similar risk investments over a period of 10 years.
3. Break-even within the first two years of operation.
When evaluating both the pessimistic and optimistic revenues, Kellers’ Freehouse would break-even
within the second year of operation and onwards. Please see the pessimistic and optimistic cost-
volume-profit analysis sections in Appendix A (pages 15-16) for reference.
6. Pg. 03 Introduction
The objectives set by the Keller’s are reasonable, but barely obtainable with their current business model. A
bank loan of approximately $250,000 (in addition to the $200,000 initial investment) would be required to cover
start-up and operational costs within the first three years; however, if revenue levels fall to near the pessimistic
level, the venture would never be able to sustain itself.
Potential Problems
Kolsch Executive Consulting has identified six potential problems with the venture below.
1. Restaurant Location
Issue: leased property location may not be ideal to attract high customer turnout. If the customer turn-
out is low, revenue will suffer and the annual draws of $50,000 will not be able attainable without going
into debt, due to high start-up and operational costs.
Solution: ensure that the restaurant location is in a transit accessible and safe area to attract more
customers. Ensuring that there is ample parking will benefit customer turn-out. Investing in an larger
advertising campaign could also help to increase customer turn-out.
2. Beer Quality
Issue: it is challenging to creating a good tasting beer. If customers do not like the taste of the craft
beer, they will not be likely to return.
Solution: engage focus groups for beer tasting/reviews on small batches of brew before continuing with
full-scale production.
3. Start-up Costs
Issue: high start-up costs to open a restaurant/brewpub. Between brewing equipment, property
renovations and kitchen equipment, the start-up costs exceed the initial capital investment by $35,800.
Solution: Focus on either being a restaurant or a brewpub before expanding the business.
4. Serving Alcohol
Issue: large liability involved with serving alcohol. Employees require serving it right, ID checks are
required to avoid large fines, alcohol warning signage must be displayed and property damage is
possible from aggressive and intoxicated customers.
Solution: invest in proper staff training and limit hours of operation.
5. High Industry Failure Rate
Issue: 60% of restaurants fail within the first year and 80% fail within five years. Developing new
procedures and recipes, all while training new staff, can prove to be a daunting task for new restaurants
owners/kitchen managers.
7. Pg. 04 Introduction
Solution: ensure that the kitchen manager has adequate experience and that procedures/recipes are
thought-out and implemented prior to opening. Also, ensure that the waiting staff are properly
qualified/trained prior to opening, to ensure good quality of service to customers.
6. Quality Ingredients
Issue: a new business must source all supplies and ingredients without any existing supplier
relationships or prior knowledge of the products they are buying. The restaurant may struggle to source
quality ingredients necessary to make good tasting food.
Solution: sample products prior to ordering and use existing supplier relationships from previous
employment experience (i.e. from the soda industry).
Despite the above problems, Kolsch Executive Consulting believes that the potential problems can be
overcome with some altercations to the business model (see alternatives section on page 11).
8. Pg. 05 Financial Analysis
Financial Analysis
The following sections will analyze the investment potential, detail the forecasted financial statements and
summarize the cost-volume-profit analysis for Kellers’ Freehouse.
Net Present Value
The net present value was calculated for time periods of 5 and 10 years to compare the Kellers’ Freehouse
investment to a comparable mutual fund with a 10% rate of return. The required rate of return for the Kellers’
Freehouse was set to be equal to the mutual funds rate of return in the comparison. Please see table 3 below.
Table 3: Net Present Value Comparison
Return on Investment 5 Years Mutual Funds Rate of Return 10.00%
Original Investment 200000 Kellers' Annual Return 50000
Risk Investment Kellers' House
Return on Investment $107,228.36
Original Investment $200,000.00
Profit or Loss ($10,460.66)
Return on Investment 10 Years Mutual Funds Rate of Return 10.00%
Original Investment 200000 Kellers' Annual Return 50000
Risk Investment Kellers' House
Return on Investment $307,228.36
Original Investment $200,000.00
Profit or Loss $107,228.36
Mutual Funds
Net Present Value Kellers' vs. Mutual Fund
Mutual Funds
$31,551.62
$200,000.00
$31,551.62
$92,865.21
$200,000.00
$92,865.21
The above comparison assumes that the original investment of $200,000 is retained in the mutual fund
investment, but not retained in the Kellers’ Freehouse venture. Within a period of 5 years, the mutual fund
investment is the better investment. However, within 10 years, Kellers’ Freehouse generates a marginally larger
return on investment. As such, the Kellers’ Freehouse would be a better long-term investment over a period equal
to or greater than 10 years.
9. Pg. 06 Financial Analysis
Internal Rate of Return
The rate of return for a five-year investment is approximately 8%. If the time period allotted for the investment was
only five years, with a required rate of return of 10%, the Kellers’ Freehouse investment would not be
recommended. However, when looking at a ten-year investment time period, the venture would be profitable, as the
internal rate of return would be 21% (significantly higher than the required rate of return).
The present value factor calculation can be seen below.
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑂𝑢𝑡𝑙𝑎𝑦
𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝐴𝑚𝑜𝑢𝑛𝑡
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 =
200,000
50,000
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 = 𝟒
This present value factor equates to present value interest factors of annuity of approximately 8% for a five-year
period and 21% for a ten-year period. This difference can be attributed to higher annual returns from the Kellers’
Freehouse venture. However, this assumes that Kellers’ Freehouse can produce an annual income of $50,000
from year one, which is not the case (see cost-volume-analysis section below).
Financial Statements
We’ve completed three years of projected income statements (Appendix A, page 17); when reviewing the
pessimistic projected income, Kellers’ Freehouse would have a net loss of $189,928 in their first year. With the
Keller brothers planning to take a $50,000 annual draw, this would take their retained earning for year one to a
negative value of ($239,928). In the remaining two years, Kellers’ Freehouse would have a positive net income;
but, after their $50,000 draw, and the kitchen manager’s bonus, their retained earnings would still be decreasing in
year three and beyond.
When reviewing the optimistic numbers, with a sales revenue of $750,000, Kellers’ Freehouse would experience a
net loss in year one of $96,638, and a retained earning of ($146,638). However, by the end of year three their
retained earnings would be positive at $3,854. Their projected net income would again be positive by the end of
year two.
Cost-Volume-Profit Analysis
For our cost-volume-profit (CVP) analysis, we focus on three areas: cost classification (account analysis), break-
even analysis, and margin of safety.
10. Pg. 07 Financial Analysis
Cost Classification (Account Analysis)
Kellers’ has a total start-up cost of $235,800 including a large renovation, new kitchen, and their brewing system.
The fixed costs for Kellers’ Freehouse is $219,900, and their variable costs will change depending on their
revenue. We have used a pessimistic revenue of $550,000 and an optimistic revenue of $750,000 (according to
industry standards) to calculate our variable costs.
Table 1: Account Analysis
Break-even Analysis
Kellers’ Freehouse will be able to cover both their variable and fixed costs with an annual sales revenue of
$957,043.39 in year one, which is significantly higher than the optimistic revenue stream of $750,000 annually.
Even then, at their break-even point, the Keller brothers would not be able to take their $50,000 annual draw, to do
so, they would need a sales revenue of over a million dollars. In year two, the break-even point is reduced to
$451,847.88 of required annual revenue. Please reference the CVP analysis sections in Appendix A (pages 15-
16).
Items Amount Items Amount Items Pessimistic Optimistic
Annual License 700$ Renovation 75,000$ Waitstaff 99,000$ 135,000$
Promotion 10,000$ Legal Fees 800$ Brewing Costs 9,900$ 13,500$
Kitchen Manager Salary 25,000$ Brewing System 115,000$ Food 132,000$ 180,000$
Brewmaster Salary 30,000$ Kitchen Equipment 25,000$ Bottle Beer 16,500$ 22,500$
Brewing System Dep. 11,500$ Inventory 20,000$ Wine 15,180$ 20,700$
Kitchen Dep. 2,500$ Spririts 8,662.50$ 11,812.50$
Renovation Dep. 15,000$ Soft Drinks 385$ 525$
Resturant Costs 62,200$ Juice/Other 660$ 900$
Lease 54,000$ Theft 11,000$ 15,000$
Total 210,900$ 235,800$ 293,287.50$ 399,937.50$
Total Fixed + Startup Costs 446,700$ 293,287.50$ 399,937.50$
Fixed Costs Variable CostsStartup Costs (One-Time Costs)
11. Pg. 08 Financial Analysis
Within the first year of
operations, Kellers’ Freehouse
would need to serve 219
customers a day, earning
$2,622.04 daily to break-even.
For the first year, we include
the start-up costs within
Kellers’ Freehouse total fixed
costs, creating a higher break-
even point.
In year two, the break-even
point is more accessible;
Kellers’ Freehouse would
need to serve only 103
customers a day, making a
daily revenue of $1,237.94.
For the second year, we
assume the start-up costs
have been covered in full
during year one and no debt
has been incurred.
After the first year, it is
expected that Kellers’
Freehouse would be able to
achieve a positive net income
at both the pessimistic and
optimistic revenues.
Figure 1: Daily Break-even Charts
People Sales Variable Cost Fixed Cost BE People BE Sales
0 0 1223.84 1223.84 0 2622.04
440 5280 4031.04 1223.84 219 2622.04
219 0
People Sales Variable Cost Fixed Cost BE People BE Sales
0 0 577.81 577.81 0 1237.94
200 2400 1859.81 577.81 103 1237.94
103 0
0
1000
2000
3000
4000
5000
6000
0 100 200 300 400
Dollars($)
Customers
Year 1 Daily Break-even
Sales
Variable Cost
Fixed Cost
Break-even
0
500
1000
1500
2000
2500
3000
0 50 100 150 200 250
Dollars($)
Customers
Year 2 Daily Break-even
Sales
Variable Cost
Fixed Cost
Break-even
12. Pg. 09 Financial Analysis
Margin of Safety
The margin of safety, when looking at the pessimistic and optimistic annual revenue streams of $550,000 and
$750,000, respectively, is negative for year one, since the revenue does not meet the break-even threshold.
In year two, both the pessimistic and optimistic revenue streams yield positive margins of safety. The pessimistic
revenue stream leads to a margin of safety ratio of 18%. Alternatively, the optimistic revenue stream leads to a
margin of safety ratio of 40%. Please see table 2 below for the margin of safety calculations.
Table 2: Margins of Safety and Margin of Safety Ratio Calculations
Year 1 Year 2
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 = 𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝑺𝒂𝒍𝒆𝒔 − 𝑩𝒓𝒆𝒂𝒌 𝒆𝒗𝒆𝒏 𝑺𝒂𝒍𝒆
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 (𝑷𝒆𝒔𝒔𝒊𝒎𝒊𝒔𝒕𝒊𝒄)
= $𝟓𝟓𝟎, 𝟎𝟎𝟎 − $𝟗𝟓𝟕, 𝟎𝟒𝟑. 𝟑𝟗
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 (𝑷𝒆𝒔𝒔𝒊𝒎𝒊𝒔𝒕𝒊𝒄) = ($𝟒𝟎𝟕, 𝟎𝟒𝟑. 𝟑𝟗)
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 (𝑶𝒑𝒕𝒊𝒎𝒊𝒔𝒕𝒊𝒄)
= $𝟕𝟓𝟎, 𝟎𝟎𝟎 − $𝟗𝟓𝟕, 𝟎𝟒𝟑. 𝟑𝟗
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 (𝑶𝒑𝒕𝒊𝒎𝒊𝒔𝒕𝒊𝒄) = ($𝟐𝟎𝟕, 𝟎𝟒𝟑. 𝟑𝟗)
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚
𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝑺𝒂𝒍𝒆𝒔
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 (𝑷𝒆𝒔𝒔𝒊𝒎𝒊𝒔𝒕𝒊𝒄)
=
($𝟒𝟎𝟕, 𝟎𝟒𝟑. 𝟑𝟗)
$𝟓𝟓𝟎, 𝟎𝟎𝟎
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 (𝑷𝒆𝒔𝒔𝒊𝒎𝒊𝒔𝒕𝒊𝒄) = (𝟕𝟒%)
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 (𝑶𝒑𝒕𝒊𝒎𝒊𝒔𝒕𝒊𝒄) =
($𝟐𝟎𝟕, 𝟎𝟒𝟑. 𝟑𝟗)
$𝟕𝟓𝟎, 𝟎𝟎𝟎
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 (𝑶𝒑𝒕𝒊𝒎𝒊𝒔𝒕𝒊𝒄) = (𝟐𝟖%)
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 = 𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝑺𝒂𝒍𝒆𝒔 − 𝑩𝒓𝒆𝒂𝒌 𝒆𝒗𝒆𝒏 𝑺𝒂𝒍𝒆
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 (𝑃𝑒𝑠𝑠𝑖𝑚𝑖𝑠𝑡𝑖𝑐) = $550,000 − $451,847.88
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 (𝑃𝑒𝑠𝑠𝑖𝑚𝑖𝑠𝑡𝑖𝑐) = $𝟗𝟖, 𝟏𝟓𝟐. 𝟏𝟐
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 (𝑂𝑝𝑡𝑖𝑚𝑖𝑠𝑡𝑖𝑐) = $750,000 − $451,847.88
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 (𝑂𝑝𝑡𝑖𝑚𝑖𝑠𝑡𝑖𝑐) = $𝟐𝟗𝟖, 𝟏𝟓𝟐. 𝟏𝟐
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒇 𝑺𝒂𝒇𝒆𝒕𝒚
𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝑺𝒂𝒍𝒆𝒔
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 (𝑃𝑒𝑠𝑠𝑖𝑚𝑖𝑠𝑡𝑖𝑐) =
$98,152.12
$550,000
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 (𝑃𝑒𝑠𝑠𝑖𝑚𝑖𝑠𝑡𝑖𝑐) = 𝟏𝟖%
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 (𝑂𝑝𝑡𝑖𝑚𝑖𝑠𝑡𝑖𝑐) =
$298,152.12
$750,000
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 (𝑂𝑝𝑡𝑖𝑚𝑖𝑠𝑡𝑖𝑐) = 𝟒𝟎%
13. Pg. 10 Market Analysis
Market Analysis
SWOT
STRENGTHS
- New kids on the block.
- Passionate and motivated.
- Partnership – smaller start-up costs/legal fees.
- Large initial capital investment.
WEAKNESSES
- Little to no experience in restaurant/brew pub
industry.
- Competitive industry.
- No supplier relationships.
- Fully liable (unless they incorporate)
- No established customer base.
OPPOURTUNITIES
- Open other locations.
- Franchise/become chain.
- Can sell beer to other restaurants and to liquor
stores.
- Festivals – music, beer, and food; could create
an event truck.
THREATS
- Stiff competition: new brew pubs, and “big”
brewers.
- Laws could change making brew pubs illegal
again.
- Hard to create a good tasting beer.
PEST
POLITICAL-LEGAL
- Strongly regulated industry.
- Price controlled industry.
- Previously microbreweries were illegal.
ECONOMIC
- Issues with barley – such as import issues or
crop issues in Alberta.
- Costly to keep up with “hip” flavours (i.e.
pumpkin).
- Beer is the number 1 consumed alcohol in
Canada.
- 50% of restaurants fail in the first year; 80% fail
within five years.
SOCIAL
- Diets/health – gluten free beer is becoming more
popular.
- Seasonal – stouts = winter, radlers = summer,
fall = pumpkin flavoured, etc.
TECHNOLOGICAL
- Changes in brewing technology.
- Changes in POS systems, costly to upgrade (i.e.
implementing a “tap” system).
- Brewing at home could become a reality,
decreasing interest in microbreweries.
Price
The brew pub industry is strongly regulated and prices are controlled by the Liquor Control Board of Ontario. The
typical price for 341ml of craft beer is $2.00 - $2.50.
14. Pg. 11 Alternatives
Alternatives
Kolsch Executive Consulting has laid out three separate alternatives to the suggested business venture to compare
alternate contribution margins and required revenues to break-even.
Alternative 1 – Do Not Sell Bottled Beer or Wine
If the Kellers’ Freehouse did not sell bottled beer or wine (assuming that the annual revenue remained the same
and that all lost revenue from bottled beer and wine directly increased house brew revenue from 12% to 28%),
Kellers’ Freehouse could increase their contribution margin ratio on sales from 46.68% to 50.04%. This would drop
the revenue required to break-even from $935,618.64 to $892,775.06 in year one. In year two, the required
revenue to break-even would drop from $430,423.14 to $421,504.95. Please see the alternative 1 pessimistic cost-
volume-profit analysis in Appendix B (page 18) for reference.
Alternative 2 – Do Not Open Restaurant
If the Kellers’ Freehouse only served alcohol, they could reduce their start-up and fixed costs significantly. For this
alternative, we will assume that the annual revenue drops by 20%, that the percentage of revenue lost from food
directly increases the percentage of revenue for house brew (from 12% to 72%), that the fixed costs decrease by
$55,000 (chef and kitchen manager salary) that the start-up costs decrease by $35,000 (kitchen equipment and
50% of start-up inventory), and that the kitchen/waiting staff variable costs drop from 18% total revenue to 8% total
revenue. If Kellers’ Freehouse no longer served food, the start-up costs would decrease from $235,800 to
$200,800, the fixed costs would decrease from $210,900 to $155,900, the total contribution margin ratio would
increase from 46.68% to 71.68%, and the total revenue required to break-even would drop from $957,043.39 to
$497,993.06 for year one and from $451,847.88 to $217,509.59 for year two. However, the pessimistic total
revenue would drop from $550,000 to $440,000 and the optimistic total revenue would drop from $750,000 to
$600,000 (assuming a 20% loss in business). Please see the alternative 2 pessimistic cost-volume-profit analysis
in Appendix B (page 19) for reference.
Despite the loss of revenue, the margin of safety ratio for the pessimistic revenue would increase from (74%) to
(13%) in year one and from 18% to 51% in year two. The margin of safety ratio for the optimistic revenue stream
would increase from (28%) to 17% in year one and from 40% to 64% in year two. In addition to the above, the
kitchen manager would no longer need to be paid 10% of net profit. If the Keller brothers decided to not open a
restaurant within their brewpub, they would be able to break-even after year one, even with the pessimistic revenue
stream, and attain their required annual draw of $50,000 after year one, without going into debt. Please see the
alternative 2 projected financial statement in Appendix B (page 21) for reference.
15. Pg. 12 Alternatives
Alternative 3 – Purchase Used Brewing System
If the Kellers’ Freehouse decided to purchase the brewing system used, instead of new, they could reduce the
break-even point significantly for year one. If they could purchase a five-year-old brewing system for $50,000
(instead of a new one for $115,000) and assuming the used one would fully depreciate in 5 years, they could
significantly reduce the required revenue to break-even. The break-even amount would drop from $950,043.39 to
$814,568.83 in year one and from $451,847.88 to $448,634.17 in year two. Please see the alternative 3
pessimistic cost-volume-profit analysis in Appendix B (page 20) for reference.
16. Pg. 13 Recommendations
Recommendations
Kolsch Executive Consulting recommends following alternative 2, detailed on the previous page. If Kellers’
Freehouse goes ahead with their current business model, they will almost certainly go out of business within 5
years (if not sooner), unless optimistic revenue levels can be achieved and sustained. As such, Kolsch
recommends opening a brewpub without a restaurant, to make the venture feasible and profitable.
17. Pg. 14 Appendix A
Appendix A
Depreciation
Equipment Cost Useful Life in Years Depreciation Rate Per Year Annual Depreciation
Kitchen Equipment 25,000$ 10 10.00% 2,500$
Brewing Equipment 115,000$ 10 10.00% 11,500$
Renovations 75,000$ 5 20.00% 15,000$
Weighted-Average Contribution*
Product % of Sales CM Ratio Weighted
Food 60% 60% 36.00%
House Brew 12% 85% 10.20%
Bottled Brew 10% 70% 7.00%
Wine 6% 54% 3.24%
Spirits 10.50% 85% 8.93%
Soft Drinks 1% 93% 0.93%
Juice/Other 0.50% 76% 0.38%
Total 66.68%
*prior to 18% kitchen/waiting staff and 2% cushion variable costs
