South Dakota Microbrewry Case

In: Business and Management

Submitted By yfan22
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1. According to the gross margin ratio calculations (see Exhibit 1-a, 1-b), Bismark Bock is the most profitably beer label followed by Four Heads Stout and finally Buffalo Ale. Buffalo Ale’s low profitability is due to having the lowest selling price and highest production costs. Having a gross profit margin percentage of 19.05% means that Buffalo Ale generates $0.19 of gross profit for every sales dollar. 2. When referencing the gross margin percentages of the three labels under activity based allocation (see Exhibit 2-a, 2-b, 2-c), Buffalo Ale is the most profitable followed by Four Heads Stout and finally Bismark Bock. Bismark Bock has a negative gross margin percentage, which means this product does not make profit. This loss is a result of high production costs per bottle which are not compensated by the current selling price. These results show how profitability evaluation is highly affected by cost allocation methods. For instance, in question 1, Bismark Bock was ranked as the most profitable label when the plant-wide allocation method based on direct labor hours was used. 3. In theory the two different allocation methods should have no effect on the ending net income. This is because sales prices, number of batches produced and total production costs remain unchanged. According to the calculations, the net income is $51 greater when using activity based allocation compared to using plant-wide allocation (see Exhibit 3-a, 3-b), because the rounding issue. But we think no matter what the allocation method we use, the whole company’s net income will not change. 4. The problem South Dakota Microbrewery faces is the major discrepancies in its profit margin percentages when using the two different cost allocation methods. The company's current plant-wide allocation system concludes that Buffalo Ale is the least profitable label and Bismark Buck is…...

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