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The Anheuser Busch Corporation reported the following operating information for a recent year (in millions): $$ \text { "Before special items } $$ Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(12,911 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . \) 7,950 Marketing and distribution . . . . . . . . . . . . . . . . . . . 2,256 \(10,206 Income from operations . . . . . . . . . . . . . . . . . . . . . \) 2,705* In addition, Anheuser Busch sold 107 million barrels of beer during the year. Assume that variable costs were 70% of the cost of goods sold and 45% of marketing and distribution expenses. Assume that the remaining costs are fixed. For the following year, assume that Anheuser Busch expects pricing, variable costs per barrel, and fixed costs to remain constant, except that new distribution and general office facilities are expected to increase fixed costs by $110 million. Rounding to the nearest cent: a. Compute the break-even sales (barrels) for the current year. b. Compute the anticipated break-even (barrels) for the following year.

Step by step solution

01

Determine Variable and Fixed Costs

For the current year, calculate the variable portion of the cost of goods sold (COGS) by taking 70% of the total COGS which is \( 7,950 \) million. This yields \( 0.70 \times 7,950 = 5,565 \) million. Calculate the fixed portion by subtracting the variable costs from the total COGS: \( 7,950 - 5,565 = 2,385 \) million. For marketing and distribution expenses, calculate the variable portion by using 45% of \( 2,256 \) million, which is \( 0.45 \times 2,256 = 1,015.2 \) million. The fixed portion is \( 2,256 - 1,015.2 = 1,240.8 \) million.

02

Compute Total Fixed Costs for the Current Year

Add the fixed costs from COGS and marketing and distribution to find the total fixed costs for the current year: \( 2,385 + 1,240.8 = 3,625.8 \) million.

03

Calculate Contribution Margin per Barrel

Determine total variable costs by adding the variable costs from COGS and marketing and distribution: \( 5,565 + 1,015.2 = 6,580.2 \) million. The contribution margin is total net sales minus total variable costs, which is \( 12,911 - 6,580.2 = 6,330.8 \) million. Calculate the contribution margin per barrel by dividing this by the number of barrels sold: \( \frac{6,330.8}{107} \approx 59.17 \) million per barrel.

04

Compute Break-Even Sales for Current Year

Use the break-even formula: Break-even point in barrels is total fixed costs divided by contribution margin per barrel. This is \( \frac{3,625.8}{59.17} \approx 61.3 \) million barrels.

05

Update Fixed Costs for Following Year

For the following year, fixed costs include the increase of \( 110 \) million in fixed costs. Calculate the new total fixed costs: \( 3,625.8 + 110 = 3,735.8 \) million.

06

Compute Anticipated Break-even Sales for Following Year

Divide the new fixed costs by the contribution margin per barrel to find the anticipated break-even point in the following year: \( \frac{3,735.8}{59.17} \approx 63.1 \) million barrels.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Variable Costs

Variable costs are expenses that fluctuate depending on the level of production or sales volume. In this exercise, we determine variable costs for Anheuser Busch by considering two main categories: the Cost of Goods Sold (COGS) and marketing and distribution expenses. - **For COGS:** 70% is variable, so at \(7,950 million total, the variable cost is calculated as \(0.70 \times 7,950 = 5,565\) million. - **For Marketing and Distribution:** 45% of \)2,256 million results in variable costs of \(0.45 \times 2,256 = 1,015.2\) million. Variable costs are essential in break-even analysis, impacting the total cost structure and determining profitability at various production levels.

Contribution Margin

The contribution margin is a critical metric that indicates how much revenue from each unit sold contributes toward covering fixed costs. It is derived by subtracting total variable costs from net sales. In the exercise, with net sales at \(12,911 million and total variable costs of \)6,580.2 million, the contribution margin is calculated as: \[12,911 - 6,580.2 = 6,330.8 \ ext{ million}\]The contribution margin per barrel is then determined by dividing the total contribution margin by the number of barrels sold: \[\frac{6,330.8}{107} \approx 59.17 \ ext{ million per barrel}\]The per-unit figure helps understand how each barrel sold contributes to covering fixed costs and profits beyond the break-even point.

Fixed Costs

Fixed costs are expenses that do not change with production volumes within a certain range. For Anheuser Busch, these include a fixed portion of both COGS and marketing and distribution expenses.- **Fixed COGS:** Total COGS minus the variable portion: \(7,950 - 5,565 = 2,385\) million.- **Fixed Marketing and Distribution Expenses:** Total expenses minus variable costs: \(2,256 - 1,015.2 = 1,240.8\) million.The total fixed costs for the year amount to: \[2,385 + 1,240.8 = 3,625.8 \ ext{ million}\] The next year's anticipated fixed costs include an additional \(110 million for new facilities, which increases total fixed costs to \)3,735.8 million. Fixed costs are pivotal for computing the break-even point and assessing financial stability over various output levels.

Cost of Goods Sold (COGS)

The Cost of Goods Sold (COGS) represents direct costs attributable to the production of goods sold by a company. For Anheuser Busch, COGS in this exercise includes both variable and fixed cost components. - **Variable Costs within COGS:** Calculated as 70% of the total, giving $5,565 million. - **Fixed Costs in COGS:** The remainder, $2,385 million, reflects fixed costs. Understanding COGS is fundamental when analyzing a company's profitability and efficiency. Managing and optimizing COGS impacts the overall profit margin, making it a key area for cost control strategies.

Marketing and Distribution Expenses

Marketing and Distribution Expenses include the costs associated with promoting and delivering products. They are split between variable and fixed components: - **Variable Component:** 45% of the total, or $1,015.2 million. - **Fixed Component:** The remainder, amounting to $1,240.8 million. These expenses are crucial as they directly affect the company's ability to reach customers effectively. Keeping a balance between investment in marketing and maintaining cost efficiency is essential for maximizing revenue and market reach.