ISSUES IN ACCOUNTING EDUCATION American Accounting Association

Vol. 31, No. 4 DOI: 10.2308/iace-51189

November 2016
pp. 409–415

Arizona Microbrewery, Inc.: An Instructional

Case on Management Decision Making
Janet A. Samuels
Arizona State University

Kimberly M. Sawers
Seattle Pacific University
ABSTRACT: This case provides students with an opportunity to utilize cost volume profit (CVP) analysis tools in a
contextually rich environment of a microbrewery. The case explores basic CVP concepts as well as decision making
for constrained resources, make versus buy, and new product development. Further, the case requires quantitative
analysis, understanding, and exploration of contextual issues as well as assessment of qualitative factors. While
directed at graduate students (M.B.A. and E.M.B.A.) in a managerial accounting course, this case may also be
suitable for undergraduate students with some minor modifications.
Keywords: cost volume profit (CVP); breakeven, target profit; ‘‘what if’’ analysis; constrained resources; make
versus buy; add a product line.

THE CASE

I
n 2009, David Tucker quit his job at a large beer company to start his own brewery, Arizona Microbrewery, Inc. (AMI).
His family supported his decision and invested in the business along with David. AMI began operations on January 10,
2010 and now produces four labels of specialty beers (Saguaro Pale Ale, Bisbee Bock, Ocotillo Amber Pilsner, and
Sedona Stout). An explanation of the beer-making process is shown in Appendix A.
In much of the United States (including Arizona), beer is sold in a ‘‘three-tier’’ system. Under this system, beer is
manufactured by producers, sold to distributors, who then sell to retailers (such as liquor stores, drug stores, and grocery
stores). David employs two salespeople who receive a fixed monthly salary plus an 8 percent commission. All beer is sold to
beer distributors (primarily in the Southwestern United States) in cases of 24 bottles. Product sales and cost information for
2013 are shown in Exhibit 1 with additional information in Exhibit 2. David rents a facility that is used to make the beer, a
refrigeration area to store the beer, and a small office area. AMI brewery has five machines with 9,300 total machine hours
available per year to produce beer (assuming AMI remains on one shift with some normal maintenance, breaks, etc.). While
there is an empty space in the facility that could be used to expand the beer operations, the company would need to purchase an
additional grain hopper and brew house for about $100,000 (the current water system and process control system could be
expanded to handle the new machine). As discussed in Appendix A, beers are aged in a refrigeration area prior to sale. The
current refrigeration unit allows for different temperatures in different areas of the unit and the unit is usually running about 80
percent full. Keeping the refrigeration unit somewhat full helps reduce refrigeration costs.1 Additionally, since the company is
so new, sales have been growing but erratic (from 2010 to 2011, sales growth was over 45 percent; however, from 2012 to
2013, sales growth was only 12 percent). Thus, keeping more beer on hand allows the company to meet the erratic demand
without loss of sales.

We thank the editor, associate editor, and two reviewers for their helpful suggestions for improving the manuscript.
Editor’s note: Accepted by Lori Holder-Webb.
Submitted: February 2015
Accepted: June 2015
Published Online: June 2015

1
Opening and closing the refrigeration unit when it is very empty results in a greater temperature drop as more warm air gets into the refrigeration unit
compared to when the refrigeration unit is very full; thus, keeping the refrigeration unit somewhat full helps reduce refrigeration costs.
409
410 Samuels and Sawers

EXHIBIT 1
2013 Cost and Sales Information

Panel A: Per Case Information

Ocotillo
Saguaro Bisbee Amber Sedona
Pale Ale Bock Pilsner Stout Total
Sales Price $21.00 $24.50 $23.50 $26.50
Direct Materials per case 2.75 2.90 3.15 4.00
Direct Labor per case 3.75 3.75 3.00 5.25
Variable Overhead per case 5.90 6.18 6.10 6.34
Total Variable Cost per case 12.40 12.83 12.25 15.59
Contribution Margin per Case $8.60 $11.67 $11.25 $10.91

Cases Sold last year 12,593 7,126 6,827 4,184 30,730

Direct Labor Hours per case 0.25 0.25 0.20 0.35
Total Direct Labor Hours last year 3,148.25 1,781.50 1,365.40 1,464.40 7,759.55
Machine Hours per case 0.20 0.40 0.25 0.30
Total Machine Hours last year 2,518.60 2,850.40 1,706.75 1,255.20 8,330.95

Panel B: Contribution Margin Income Statement

Ocotillo
Saguaro Bisbee Amber Sedona
Pale Ale Bock Pilsner Stout Total
Sales $264,453.00 $174,587.00 $160,434.50 $110,876.00 $710,350.50
Variable Costs 156,153.20 91,426.58 83,630.75 65,228.56 396,439.09
Contribution Margin $108,299.80 $83,160.42 $76,803.75 $45,647.44 $313,911.41
Direct Fixed Costs 10,329.62 8,392.91 6,017.39 9,893.92 34,633.84
Segment Margin 97,970.18 $74,767.51 $70,786.36 $35,753.52 $279,277.57

Common Fixed Costs 245,389.44

Operating Income $33,888.13
Taxes (35%) 11,860.85
Net Income $22,027.28

David has not taken a salary since the business started. While the business has been generating a small profit, David has
been reinvesting the earnings in the business. He wants to grow the business to generate more profit for his family and himself.
David has been considering increasing the price on Sedona Stout from $26.50 per case to $29.00 per case. He thinks that, with
this price increase, unit sales will decrease from 4,184 cases to 3,750 cases per year. However, this would only reduce total
annual Stout revenues to $108,750 from $110,876. Alternatively, David could drop the price of Sedona Stout to $25 per case.
This is much closer to the Bock price as well as the Pilsner. Based on his market research, he thinks that this will result in Stout
sales increasing to 4,700 cases per year. He is leaning toward this alternative as this will increase Stout revenues from $110,876
to $117,500 per year.
While the company has some cash on hand, neither the company nor David’s family have another $100,000 to invest in the
business right now for a new grain hopper and brew house. Since the business is new and has been showing only small profits,
David has not been able to get a loan to expand the business. Instead, David wants to fully utilize the machines they already
have. In 2013, they used a little over 8,300 machine hours (as shown in Exhibit 1) and the existing five machines have a total of
9,300 machine hours available during the year (assuming normal maintenance and some repairs needed during the year). Thus,
the existing machines have approximately 1,000 additional hours available for use. David wants to keep producing and selling
all four of his product lines because many of the beer distributors like buying from breweries that offer several different beers.

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Arizona Microbrewery, Inc.: An Instructional Case on Management Decision Making 411

EXHIBIT 2
Additional Cost Information

Panel A: Details of Total Variable Costs

Direct Materials $93,537.20
Direct Labor 116,393.25
Production Supplies 26,064.41
Variable Portion of Maintenance 40,892.55
Variable Portion of Utilities 27,610.57
Variable Office Supplies (sales forms, etc.) 3,493.88
Shipping Costs 31,619.19
8% Sales Commission 56,828.04
Total Variable Costs $396,439.09

Panel B: Details of Total Fixed Costs (Direct and Indirect)

Brew Master/Quality Control Manager $60,293.15
Receiving and Shipping Department Expenses 22,511.32
Depreciation 11,712.10
Facility Costs (rent, taxes, insurance, etc.) 78,938.15
Advertising and Marketing Costs 22,994.91
Fixed Portion of Maintenance (including IT support) 9,992.98
Fixed Portion of Utilities (including refrigeration) 10,390.37
Fixed Portion of Office Supplies 4,305.66
Fixed Salary of Salespeople 32,221.81
Administrative Staff to Assist Owner 26,662.83
Total Fixed Costs $280,023.28

However, he wants to direct the salespeople to emphasize a certain product when they are out talking to the beer distributors.
Given the current machine availability, David is not sure what beer product line to tell the sales people to emphasize in order to
maximize his profits.
Finally, David and his family love root beer. Root beer follows a somewhat similar process to beer in that the ingredients are
mixed together to form a ‘‘culture’’ that then goes through fermenting, filtering, and filling. Root beer would not need to be aged or
stored in the refrigerator. There is an empty area in the current microbrewery facility that could be dedicated to making root beer.
As a result, David has been talking with his family about producing and selling a line of specialty root beer. Root beer would be
produced using different machinery rather than the existing five beer machines. David’s sister knows someone who is getting out
of the soda business and would be willing to sell the used machinery needed to make the root beer for $8,000. Based on market
research he has done, David thinks that he could charge $16.50 per case of root beer. Based on the same market research, there is a
lot of uncertainty in how many cases of root beer the company could sell. David is less familiar with the root beer market and there
is a wide range in sales of specialty root beer in the local groceries. Based on his understanding of the market, he thinks he could
sell between 3,000 and 12,000 cases of root beer per annum with likely sales of about 6,000 cases.
Root beer could be sold to some of his current distributors. However, soda does not need to be sold through the three-tier
system that is required for alcohol sales. Therefore, much of root beer sales would be directly to upscale groceries such as La
Grande Orange Grocery and Pizzeria in Phoenix and Whole Foods and AJ’s Fine Foods with locations throughout Arizona. David
could produce the root beer in-house or out-source the production. David has talked with another company who could produce the
root beer for AMI using David’s recipe and AMI could sell it as their brand (this option is referred to as ‘‘private label’’). It could
be purchased from this other company for $13.05 per case. AMI would still need to incur some variable handling costs and some
minor fixed costs. Alternatively, AMI could produce the root beer in house. See Exhibit 3 for estimated cost information.

CASE REQUIREMENTS
You have been hired as a consultant to help David with the business. Please address the following questions in preparation
for your discussions with him.

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EXHIBIT 3
Root Beer Cost Information

Panel A: Alternative 1—Produce In-House

Direct Materials per case $1.75
Direct Labor per case 2.25
Variable Overhead per case 3.60
Total Variable Costs per case $7.60

Additional Fixed Costs (per year) $37,640.00

These are recurring costs and do not include the initial purchase cost of the machine.

Panel B: Alternative 2—Out-Source Production

Purchase price per case $13.05
Variable Overhead per case 0.10
Total Variable costs per case $13.15

Additional Fixed costs (per year) $6,000.00

1. Ignore any current plans. Using last year’s actual data and sales mix, how many total cases would David need to sell in
order to earn $50,000 after tax? How many of these cases would be Ocotillo Amber Pilsner?
2. In Question 1, you identified the total number of cases the company needs to sell to earn $50,000 after tax (and how
many cases of Ocotillo Amber Pilsner). Assume you did the calculations in Question 1 correctly. However, before
discussing your solution with the owner, identify and explain at least three issues related to your analysis and the
assumptions employed in your analysis in Question 1 (discuss each concern; what it is and why it is a concern; do not
just question general facts of the case such as why AMI is charging a certain price for one product or how AMI can
reduce direct material cost).
3. Ignore the desire to earn $50,000 after tax and refer to the original data. David has a few options regarding Sedona Stout
pricing: (a) keep the sales price the same (no change), (b) increase the sales price, or (c) decrease the sales price. What
would you recommend he do and why? Provide both quantitative and qualitative analysis.
4. Next, ignoring the Sedona Stout information, consider David’s question regarding what product line the sales people
should emphasize. David wants their sales efforts to maximize profits and utilize the company’s current capacity. What
would you tell him? Explain your rationale.
5. Analyzing the sales forecast for root beer, what preliminary course of action do you recommend (in-house or out-source
production) and why? Support your recommendation with numbers.
6. What other issues, concerns, or further analysis do you want to discuss with David? Your issues/concerns could pertain to
whether AMI should add root beer as a new product line and, if so, the issues or concerns of producing in-house versus out-
sourcing. The issues/concerns should include both numeric and non-numeric issues. Do not just bullet point all kinds of
items; instead, talk about specifics and how they relate to this company/situation and why they are important to consider.

APPENDIX A
Beer-Making Process
Beer is the overall generic term for fermented malt beverages. There are only two kinds of beer: ale and lager. Within those
two broad categories there are many styles. Major ale styles are pale ale, India Pale Ale (IPA), porter, stout, and barleywine.
Among the major lager styles are pilsner, Märzen, bock, and dunkles (dark lager). AMI makes two ales (Saguaro Pale Ale and
Sedona Stout) and two lagers (Ocotillo Amber Pilsner and Bisbee Bock).
It is the yeast that is the significant difference between the ale and the lager. Ale yeasts coagulate loosely at the top of the
fermentation tank. Given the type of yeast, ales ferment best between 64 to 70 degrees Fahrenheit. Lager yeasts are more
successful at colder temperatures, typically 50 to 55 degrees Fahrenheit and coagulate closer to the bottom of the fermentation
tank. Lager yeasts also tend to ferment more aggressively, leaving behind less residual sweetness and flavor than ales.

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Direct Materials
Beer primarily consists of four ingredients: water, barley, hops, and yeast. A clarifying agent is also used in the beer-
making process. The different types of beer require different proportions of these ingredients and even slightly different
ingredients (e.g., pale ale uses a pale malted barley while stout is made using a darker roasted barley).

Brewing Process
Work in the brewery is typically divided into eight steps: Mashing, Lautering, Boiling, Fermenting and Conditioning,
Filtering, Filling, and Aging.

Mashing
Mashing is the first process in brewing. The barley grains are mixed with water in a large vessel. This mixture is heated
with periodic breaks, or rests, at certain temperatures to allow enzymes in the malted grains to break down the starch in the
grain into sugars.

Lautering
Lautering is when the mash is separated into a liquid and the residual grain. There are two stages to lautering. In the first
stage, called Wort Run-Off, a liquid (or extract) is separated in an undiluted form from the used grains. The second stage is
called sparging. During sparging, the extract that remains with the grains is rinsed off with hot water. The results of these two
stages are combined and the result is a dark, sugary liquid called Wort. This is returned to the original Mashing vessel.

Boiling
Boiling the Wort in the vessel ensures that the mixture is sterile and prevents infection. During the boiling step, hops are
added to the Wort. The hops contribute bitterness, aroma, and flavor compounds to the beer. The boiling must be continuous
and intense (rolling boil) and typically lasts between 60 and 120 minutes, depending on its intensity, when the hops are added
and the amount of Wort expected to evaporate. The Wort is then cooled before the fermentation stage.

Fermenting and Conditioning

The cooled Wort is put into a fermentation tank and yeast is added, which starts the fermentation process. This is also the
point at which the product is first called beer. It is during this stage that fermentable sugars are metabolized into alcohol and
carbon dioxide (the bubbles in beer). As noted above, fermentation temperatures are very different for ales versus lagers.
Fermentation takes about a week. When the sugars in the fermenting beer have been almost completely digested, the fermentation
slows down and the yeast cells will naturally start to die off and begin to settle to the bottom of the tank. At AMI, the fermentation
tanks are equipped with cooling jackets. Therefore, conditioning can take place in the same tank as fermentation. Conditioning (also
called ‘‘maturation’’) is when beer is cooled in the tanks to allow the yeast to settle to the bottom of the tank. Conditioning allows the
flavor of the beer to become smoother and is a natural filtration process (removing cloudy material from the beer).

Filtering
The beer that comes out of the fermentation tank must be filtered prior to bottling. Filtering the beer stabilizes flavor and
gives beer its gloss or ‘‘shine.’’ Filtering removes much of the yeast and any solids (e.g., hops and other grain particles) that
remain in the beer.

Filling
The filling process (also called ‘‘packaging’’) is putting the beer into the bottles in which it will leave the brewery. At this
point, carbon dioxide is added to the bottling process to increase the carbon dioxide in the beer. Cases of beer (consisting of 24
bottles) are then put into aging.

Aging
Beer is stored (aged or ‘‘lagered’’) in the refrigerator unit and the temperature and length of the aging will vary based on the type
of beer. Ales are usually aged no more than a few weeks. The aging process is generally done at 40 to 55 degrees Fahrenheit. Lagers
are similarly aged but at much lower temperatures, 32 to 45 degrees Fahrenheit, and for a much longer time (typically months).
Lagering creates a cleaner, clearer beer. The refrigeration unit allows for different temperatures in different areas of the unit.

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CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE

Overview
This case offers a cost volume profit (CVP) case that includes contextual information about operations. The case presents a
realistic setting that allows students to think ‘‘beyond the numbers.’’ Numbers are used as a starting point for discussion and
then operations, marketing, distribution, and strategy items are also considered for several of the questions. The case is
designed to reinforce the numeric concepts of CVP while also considering the practical business operations involved.

Learning Objectives
Learning objectives specific to this case include:
 Understanding how to calculate the breakeven point as well as determining the level of sales needed to achieve a desired
target profit.
 Developing an understanding of the underlying CVP analysis assumptions and the ability to identify potential related
concerns.
 Examining the effects of changes in variable costs, fixed costs, selling price, and volume on net operating income.
 Identifying both quantitative and qualitative factors to be considered in decision making.
 Determining product emphasis, given capacity constraints.
 Analyzing whether a new product line should be added.
 Determining if a product line should be made in-house or out-sourced (make versus buy).

Intended Courses and Audience

This case has been successfully used with undergraduate accounting students in managerial and cost accounting classes
and with graduate students (M.B.A. and E.M.B.A.) in managerial accounting courses. The case could be used in any
managerial or cost accounting class during which students learn CVP. It may not be uniformly appropriate for an introductory
managerial accounting course as students get the most from this case if they have already been exposed to other business
courses (marketing, operations, etc.). One of the authors, however, successfully uses this case in an introductory managerial
accounting course in which a general introduction to business course precedes the managerial accounting course for most
students.

Implementation Guidance
Distribute the case prior to the day it is due and scheduled for in-class discussion. Instruct students to work through the
case; if desired, students can prepare a written response. The case has typically been assigned in teams (from three to five
students). Students typically spend a few hours performing the calculations and coming up with the qualitative responses to the
questions (approximately 2–4 hours outside of class, with undergraduates on the higher end). Many undergraduate cases found
in textbooks are not very long and, while they do have contextual features, it is kept to a minimum. As a result, it will be
important to help undergraduate students understand why they are given so much information, which they may, at first glance,
assume is not relevant to the case or do not know how to use. For example, the information provided about the beer-making
process may seem extraneous to undergraduate students. When introducing the case, have students look over the beer-making
process and ask them why the information might be important. The instructor should elicit discussion that this information
helps the students to understand the bigger picture of the business, the production process, and helps them understand potential
issues and constraints Arizona Microbrewery, Inc. (AMI) might have when it comes to future decisions.
In an undergraduate class, on the day of class discussion, students can be divided into teams and given time to discuss their
individual responses and prepare a team response. In M.B.A. and E.M.B.A. classes, students typically prepare the case outside
of class. One discussion technique would be to assign questions to individual teams and then have the team present their
answers to the class after which the class as a whole can expand on the team’s answer. Alternatively, assign the case as a group
assignment prior to class and have groups submit a written assignment. The co-authors have followed these approaches with
M.B.A., E.M.B.A., and undergraduate managerial and cost accounting students.
The suggested time frame for case discussion is 40–50 minutes. Because the case utilizes CVP knowledge as well as tools
for decision making (e.g., differential analysis, make or buy, add or drop a product line), the case is designed for later in the
quarter or semester. For example, managerial and cost accounting textbooks typically cover CVP analysis fairly early (Chapter
5 or 6) and decision tools later (Chapters 12 or 13). Regardless, both topics should typically be covered prior to case
assignment. Note that when teaching this to M.B.A.s and E.M.B.A.s, one of the co-authors presents this case as part of the CVP

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Arizona Microbrewery, Inc.: An Instructional Case on Management Decision Making 415

TABLE 1
Summary of Student Feedback
Undergraduate
Graduate
Managerial Cost E.M.B.A.
n ¼ 50 n ¼ 27 n ¼ 23
Questions on Learning Objectives
1. Understand how to calculate the breakeven point as well as determine the level of
sales needed to achieve a desired target profit. 3.90 4.48 4.32
2. Develop an understanding of the underlying cost volume profit (CVP) analysis
assumptions and the ability to identify potential related concerns. 3.82 4.52 4.32
3. Examine the effects of changes in variable costs, fixed costs, selling price, and
volume on net operating income. 4.08 4.44 4.45
4. Identify both quantitative and qualitative factors to be considered in decision making. 4.40 4.81 4.14
5. Determine product emphasis for profit maximization, given capacity constraints. 4.04 4.26 4.23
6. Analyze whether a new product line should be added. 4.24 4.41 4.14
7. Determine if a product line should be made in-house or out-sourced (make versus
buy). 4.18 4.67 4.23
Questions on General Feedback
1. I feel more confident with the material after completing the case. 3.78 4.11 4.20
2. I thought the case was a valuable learning experience. 4.20 4.41 4.35
Survey scale was 1 to 5. For learning objective questions, 1 corresponded to the case not covering that learning objective very well and 5 corresponded to
the case covering that learning objective very well. For general feedback, 1 was ‘‘Strongly Disagree’’ and 5 was ‘‘Strongly Agree.’’

module that precedes the out-sourcing (relevant decision making) module and uses this case as a way to discuss CVP and to
start thinking about out-sourcing.

Classroom Validation
The authors collected classroom validation information from undergraduate accounting students in two managerial
accounting classes, a cost accounting class, and an E.M.B.A. managerial accounting course (while the case has been used with
M.B.A. students, classroom validation data were not collected from them). In addition to answering case questions, students
were asked to complete a brief questionnaire after the case. The mean responses (along with standard deviations) to these
questions are included in Table 1.
The results demonstrate that, overall, students felt that the case helped meet the learning objectives and was a valuable
learning experience. The E.M.B.A.s and undergraduate cost accounting students were more favorable to the case. However,
this is likely because E.M.B.A.s are used to cases and the undergraduate cost accounting students have been exposed to more
problems that contain more contextual information, more ambiguity, and uncertainty. Undergraduate managerial accounting
students are typically exposed to fewer cases and struggle more with the ambiguity involved in cases.

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