deciaion making

What is the Rationale for Investing in a New BrewPub?

Conceptual Study for the Owner of California Pizza Kitchen

IMPORTANT NOTE: This file is provided as an example – an EXAMPLE – and is by no means a template. This particular example Assignment may not even have received a good grade. Do not COPY text from here and do NOT use this as an excuse to limit your creativity or research.

Submitted by:

Roger Daltrev, Ken Yi, Jipeng Song, Thomas DeFrancisco, Karen

McGoober

AD 715: Quantitative and Qualitative Decision Making

Prof. Rich Maltzman

05/07/2019

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Table of Contents

Executive Summary 2

1. Introduction 3

2. Methodological Framework 4

2.1 Functional area #1: Marketing Management and Decision Making 4

2.2 Functional area #2: Innovation Management and Decision Making 8

2.3 Functional area #3: Operations Management and Decision Making 10

2.4 Functional area #4: Financial Management and Decision Making 11

2.5 Functional area #5: Organizational and HR Management and Decision Making 13

3. Application of Decision Support Tools 15

3.1 Selected decision support tools for functional area #1 15

3.2 Selected decision support tools for functional area #2 20

3.3 Selected decision support tools for functional area #3 22

3.4 Selected decision support tools for functional area #4 22

3.5 Selected decision support tools for functional area #5 24

4. Evaluation of the Results of the Business Simulation 27

4.1 Functional area #1: Evaluation 27

4.2 Functional area #2: Evaluation 29

4.3 Functional area #3: Evaluation 29

4.4 Functional area #4: Evaluation 30

4.5 Functional area #5: Evaluation 31

5. Conclusions and Recommendations 31

References 33

Appendices 36

Appendix 1: Introduction 36

Appendix 2: Methodological Framework 36

Appendix 3: Application of Decision Support Tools 41

Appendix 4: Evaluation of the Results of the Business Simulation 49

Appendix 5: Conclusions and Recommendations 53

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Executive Summary

The following report will summarize California Pizza Kitchen’s new business venture of

investing in a new in-house microbrewery. The pilot location for this project will be the

Prudential Center location in Boston, Massachusetts. The five functional areas: Marketing,

Innovation Management Operations Management, Financial Management, and Organizational

and HR Management will be further explained and analyzed in a detailed manner, utilizing

concrete information from the business simulator results from the 12 cycles performed. Decision

tools such as SWOT analysis, PESTEL analysis, sensitivity analysis, what-if analysis,

optimization analysis, decision tree analysis and break-even analysis were utilized in order to

determine if CPK should implement the microbrewery. Based on the research, CPK should in

fact invest and introduce a BrewPub at its Prudential location. After the start of the microbrewery

business, the total revenue will equal $965,690 in FY-1, $973,262 in FY-2, and $1,078,905 in

FY-3. At the end of the report a series of recommendations that outline an action plan will be

provided.

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1. Introduction

California Pizza Kitchen (CPK) has a loyal customer base with about 250 locations in the

United States (“California Pizza Kitchen,” n.d.). The CPK restaurant chain started in 1985 and

has become extremely well known throughout the country. In hopes of making CPK more

locally competitive, our team has chosen to invest and implement a new microbrewery

(BrewPub). The craft beer business segment is the “fastest-growing segment, up to 10% of the

market” (Cabras & Higgins, 2018). Brewing craft beer (draught beer) in-house is an innovative

opportunity that CPK has never done before. The new business unit will be completely divided

from the existing business. This unit will be managed separately but will be in total control of

CPK.

Our team chose the Prudential Center location, situated in Boston, Massachusetts, as the

pilot restaurant, due to their popular clientele and prime location. In addition to its 60 shops and

other restaurants, the 23-acre building is connected to major hotels, multiple offices, and

residential buildings (“Back Bay Prudential Center,” n.d.). CPK Prudential is a relatively large

restaurant with 40 tables that sit up to four customers each. Additionally, the restaurant has a bar

area that sits 15 customers. This results in a maximum capacity per visit of 175, a maximum

capacity per day of 1400, and a 55% average occupancy per day. The target customer for this

location is broad; however, the main consumers benefiting from the BrewPub will be individuals

between the ages of 21 to 35. This includes young adults, professionals, and even

parents/families. Our group is assuming that there will be around 310 beer consumers and 460

non-beer consumers per day (Appendix 1.1).

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The following report will be a detailed proposal for the new BrewPub business venture.

The report will address several topics including a thorough evaluation of the five main functional

areas. These functional areas are: Marketing Management and Decision Making, Innovation

Management and Decision Making, Operations Management and Decision Making, Financial

Management and Decision Making, and Organizational and HR Management and Decision

Making.

Lastly, a summary of the business simulator results will be provided following the

proposed recommended strategy, an implementation plan for the recommendation strategy, and

several beneficial and supportive concluding remarks. These remarks will redefine the overall

objectives of the project. The annual number of pints estimated for FY-1 is 129,057 for retail and

239,677 for wholesale. Additionally, the total net profit after taxes is $1,049,492 (FY-1:

$346,924, FY-2: $330,521, and FY-3: $372,056) and the total revenue $3,017,857 (FY-1:

$965,690, FY-2: 973,262, and FY-3: 1,078,905). By looking at these numbers after completing

the business simulation, it is evident that there is a high chance of profitability of investing in a

BrewPub.

2. Methodological Framework

2.1 Functional Area #1: Marketing Management and Decision Making

The first functional area of this assignment is the marketing aspect of the project. This

functional area is crucial and, in fact, “marketing is considered to be of utmost importance for the

success of new ventures” (Gruber, 2017). In order to understand the marketing aspect, it is

important to carefully examine the Four P’s (product, price, promotion, and place) of the

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Marketing Mix. These are essential factors that will come into play in all the project’s phases. A

detailed explanation of each P pertaining to the project has been provided below.

Product

CPK will offer the following craft beers to their customers (retail): Pilsner (BR01-01),

Bavarian Lager (BR01-02), Light Wheat (BR01-03), Red Wheat (BR01-04), Pale Ale

(BR01-05), and Bock Dark (BR01-06). In addition, Pilsner and Bavarian Lager will be sold to

wholesale (BR01-07 and BR01-08). Our team decided to maintain the common beer types so

they are recognizable by a worldwide audience. In addition to these beers, Zebra Special

(BR01-10) and Special Offer (BR01-11), which are two CPK in-house beers, will be offered.

Price

The price, or what the CPK customer will pay, is of high importance. The prices of the

retail beers will range from $4.00 to $5.50 (Appendix 2.1). Special Offer (BR01-11) being the

lowest price and Zebra Special (BR01-10) being the highest price. The reason Zebra Special

(BR01-10) has the highest price is due to its unique creation and differentiation from other beers

in the market. The innovation section of the report will describe its distinctive taste.

Promotion

Promotion ties directly to advertising because it is a way to persuade your target audience

to buy your product. There are several communication plans that will serve as great promotional

strategies for this venture, these are: Local Advertising, Trade Shows, Social Media, and

Website. Website and Social Media in particular will be of high importance to reach an audience

beyond the metropolitan area. In addition, a Special Offer (BR01-11) beer, the lowest priced beer

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on the menu, is part of CPK’s promotion strategy to attract more clientele. The costs of these

initiatives will be explained in the evaluation section of the report.

Place

All retail beers will be sold at the CPK Prudential location, except for the two wholesale

beers. The two wholesale beers will come in bottles and customers will be able to find these

outside the restaurant. The Prudential location is a principal aspect in the execution of this

project, due to its high volume of visits per day. Its centric location attracts a vast number of

individuals per day. As New England’s number one dining and shopping destination, it also hosts

more than 100 events per year (“Back Bay Prudential Center,” n.d.). The building is a “3.2

million square foot urban center, comprised of 2.6 million square feet of office space and

620,000 square feet of retail space” (LoopNet. n.d.). Moreover, since the building is located at

the heart of the city, the subway, commuter rail, and even Boston Logan International Airport are

just a short walk or drive away (LoopNet. n.d.).

Target Market

Defining a target market is crucial, especially for this particular venture. Though the target

market for this project is broad, individuals between the ages of 21 to 35, both male and female,

should be the target audience. This will include both young adults in college and/or at the start of

their professional career, as well as families. “About 60,000 individuals visit the building per

day, [including] tourists, locals, and more than 8,000 office customers,” and this is increasing

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every year (“Back Bay Prudential Center,” n.d.). These are the customers that would be

interested in these products regularly.

Key Marketing Costs

Since “marketing is considered to be a major key to the success of new firms,” it is

important to analyze this functional area (Gruber, 2017). The marketing costs were adjusted

(Local Advertising, Social Media, Website, Trade Shows) to determine a realistic budget for

FY-1, FY-2, and FY-3. A detailed analysis of the changes made to these costs will further be

explained in the evaluation section of the report.

Local Advertising

Local Advertising includes billboards, newspaper (online/print), magazines, radio, among

others. These types of advertising will increase exposure and help attract a wide range of nearby

customers. The aim is to utilize these strategies however, there will be more focus on the digital

marketing strategies available. Due to this, the budget for Social Media and Website is higher.

Social Media

Social Media is a key marketing cost that was added in cycle one. The effectiveness of

social media marketing is “highly influenced by its messages/contents quality, the company’s

involvement, and its association with the other marketing platforms” (Pradptarini, 2011). For

instance, it is important to integrate social media with other marketing platforms such as the

company’s website. These target customers are spending a great number of their time in social

media, and it is becoming more popular for them to look up restaurants and bars on these

platforms, “posts on social media are becoming another form of word of mouth

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recommendations, and restaurants need to be sure to provide experiences that people want to talk

about both online and off” (Cobe, 2018).

Website

For this particular project a website could help the implementation of the microbrewery

at CPK. By highlighting the new product offerings online, you can ensure that customers are

receiving accurate and updated information from a trusted online source. However, it is

important to note that the website will not be a substitution for the social media platform. In fact,

it is important for companies to integrate other media platforms such as social media to the

website as well.

Trade Shows

Trade shows are an opportunity to display and learn from new technologies and products.

For instance, an annual event of great importance for the industry is the Craft Brewers

Conference, organized by the Brewer's Association. The event hosts more than 10,000 visitors

and both BrewPub and packaging breweries. “Sharing ideas on affordable brewing and

innovative business ventures, the event explores important industry information with visitors

looking to learn from successful fellow craft beer tradespeople" (Brewers Association, n.d.).

There are also so-called beer fests that take place in Boston, such as the Extreme Beer Fest:

Boston, which takes place at the Seaport World Trade Center (BeerAdvocate, 2019). These are

great opportunities to network and make connections, inspire others, and get an overall feel of

the brewing industry.

2.2 Functional Area #2: Innovation Management and Decision Making

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Innovation and technology management is the process that transforms a creative idea into

a final product, from research to market management. This innovative process brings long-term

profitable benefits to the organization or society. For example, new products and services capture

new markets; improved products and services outweigh competition; enhanced internal processes

strengthen companies internally to save costs and develop new business models using new

revenue sources (LEAD Innovation Management). In order to increase the profit and enhance the

market competitiveness of CPK, the majority of the innovation proposal will be adapted based

on the product and technology innovation. In this case, we will be introducing a new seasonal

(only during spring, summer, autumn) beer for the seasonal market and renting a solar water

purifier to save on internal costs.

Based on the launch of new products we will increase the material cost to $0.30 per unit.

We decided to order all materials from one supply channel to save the restaurant the initial set up

costs. Thus, we can keep the same material price point for each product. We will also be using

with a fig bacon pizza.

popular with the public. The smell of sweet-scented osmanthus is warm, which could be paired

and cool unique taste. In autumn, the beer with the sweet-scented osmanthus flavor will be

limited-edition beer is crafted to perfectly blend lime juice with mint and beer to create a fresh

sales from March. After entering the summer, with the rising temperature, the summer seasonal

year. The spring special beer is a soft and rich floral-infused cherry blossom-based beer which

four. During the change of seasons, we will launch a limited-edition beer suitable for the time of

October. We set the price at $5 per unit and changed the variable costs in cycle three and cycle

The new product is Zebra Special (BR01-10), is a seasonal beer set from March to

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new technology comprising of a rented solar water purifier. This will assist in cost reduction by

allowing the restaurant to filter its own water. This will reduce the production of carbon dioxide

and reduce labor cost. To reduce material costs, we chose to rent the equipment instead of buying

a new one.

The goal of innovation management is to combine the reduction of production costs and

the introduction of new products to increase the market competitiveness of CPK, and ultimately

increase the total profits. According to the Sim-Report from the cycle three, even though the total

2.3 Functional Area #3: Operations Management and Decision Making

Operations management focuses on “planning, organizing, and supervising in the

contexts of production, manufacturing, or the provision of services. As such, it is delivery-

focused, ensuring that an organization successfully turns inputs to outputs in an efficient manner”

(Dhoul, 2019). The key factor of operations management of the BrewPub is the business

capacity. The initial projections of demand for FY-1, FY-2, and FY-3 are in the table

(Appendix 2.2).

The annual maximum production capacity of a 40 barrel BrewPub System (eight 155

gallon tanks) with the maximum capacity of 59,520 pints for one tank each year was estimated.

The total capacity for eight tanks is 476,160 pints. The brewing process takes seven days. The

demand for wholesale is around twice as much as the demand for retail. In operations

management, the goal is to balance the demand with supply. We are most concerned about

increased to $1,113,443, which is financially favorable.

revenue does not change which is $2,782,185, the total profit before taxes for these three years

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deciding when to start a new cycle, which also happens to be the cut-off point. The cut-off point

tells us about the projected demand level necessary for CPK to start brewing the product. Due to

this, in the simulator, the cut-off point of the retail products was changed but not that of the

wholesale products.

In cycle seven, the 10% rule was applied; this rule requires that the excess demand be

within 10% of total demand per product per year. In FY-1, BR01-03, BR01-04, BR01-05,

BR01-06, BR01-10 does not meet this rule. Same thing happens for BR01-04, BR01-05,

BR01-10 in FY-2, and for BR01-03, BR01-04, BR01-05, BR10 in FY-3. Since the supply is

lower than the demand for each, this can be fixed by increasing the supply using the cut-off

point. So, the cut-off point was lowered from 0.8 to 0.6 for these products (Appendix 2.3).

However, the demand of BR01-10 still exceeded 10%, so the targeted market size (per product

and FY) in the marketing table was changed in the next cycle. After changing the cut-off points,

the total revenue ended up being $3,007,227, which is higher than the total revenue in in cycle

six, which was $2,742,486 (Appendix 2.4).

2.4 Functional Area #4: Financial Management and Decision Making

Employees

Employees are extremely important for CPK, which is the key to success. For office

assistants, young workers will be hired to work part-time and half a day, from 11 a.m. to 5 p.m.

and 5 p.m. to 11 p.m. They do not need to come from a high education background, basic high

school education is enough, and this is the strategy to hire part-time staff with half the budget.

However, they must be hard-working and passionate about their job. The salary increase rate was

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set at 5% per year according to the inflation rate which is about 2% in United States plus 3%

reward for employees per year (“US Inflation Calculator,” n.d.).

A salesperson is essential for this business venture and they will be paid the highest

salary. In the current market, the highest salary for salesperson is about $45,000 per year, so one

salesperson will be hired with a salary of $45,000 per year. To encourage their effort in

promoting CPK and its products, a 10% salary increase rate has been predetermined.

For executives’ salaries, an individual that serves as a manager will be needed. This

person will be payed $10,000 more than the salary for a salesperson, and will be responsible for

coordinating the business. For the budget of miscellaneous expense, it will remain as $5,000 per

year without growth (Appendix 2.5).

Utilities, Supplies, and Other

Because of the location of CPK, the payment of Utilities, Supplies, and Other will be

higher than other locations in Boston. The payment in leasing of cars and computers will be

$2,000 a year, $4,000 a year for office supply, $8,000 a year for heat, light, phone, and $7,000

for insurance without any growth in three years (Appendix 2.6).

Marketing Costs

For the marketing costs, the payment for Local Advertising is $20,000, with the payment

of $25,000 for Social Media, and the cost for the Website is $50,000 in FY-1. The reason Social

Media and Website have a higher budget is because CPK’s target customers tend to spend a lot

of time on social media, especially on Facebook and Instagram. In order to have a higher

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exposure of CPK and its products, a strong focus on advertising Social Media and Website is

needed, with different payment increase rate for the following fiscal years (Appendix 2.7).

Rent

Since the Boston rental market is very popular, the rent was set as $60 per square feet per

year. The total floor area for CPK, located at Prudential is 200 square feet, so the rent per year

becomes $12,000. The rent will remain the same, not increase in FY-1 and FY-2, so the payment

increase remains as one (Appendix 2.8).

Debt

For debt, we are assuming CPK’s private investment is $150,000 with $20,000 loans

from Bank of America (BOA). The local interest rate was set as 5% instead of 10%. This will be

used to pay for Rent, Salaries, and Utilities (Appendix 2.9).

Taxes

For the taxes part, during FY-1 to FY-3 the total revenue falls between $846,878 to

$994,582. According to the 2019 Tax Brackets, the federal tax should be more than 24% but will

not exceed 32%, so the taxes for the profit were set as 25% (“2019 Tax Brackets,” 2018)

(Appendix 2.10).

2.5 Functional Area #5: Organizational and HR Management and Decision Making

Organizational and HR Management is key to the success of managing employees. From

research, we learned that “micro-breweries are often defined as businesses employing less than

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10 people, while small breweries are businesses employing between 11 and 50 people” (Cabras

& Higgins, 2018). CPK’s staffing plan is to have one manager to oversee the staff, one office

assistant to handle miscellaneous tasks, one salesperson to sell the products, one beer master, and

consultants may be needed. Then, we should set up a budget for human costs. We need to make a

budget based on salary.com's average salary data in this region and the importance of the

position (Appendix 2.11).

The office assistant is not part of the core staff and only needs basic qualifications such as

being computer savvy and Microsoft proficient. For this reason, this salary is aligned to the

average rate within the industry in the region. Due to the small size of the company, a couple

part-time assistants would be sufficient. The budget set aside for this role is $12,000 and a salary

increase of 5% a year (Appendix 2.11).

The salesperson is very important to CPK’s new business venture. So, the importance of

this position should be reflected by a high salary. CPK should set aside a salary slightly above

the market rate to attract and motivate the right candidate. The budget is set at $42,000 a year,

with a 10% salary increase per year (Appendix 2.11).

The executive is important, but for cost savings purposes the tasks of this individual can

be delegated among the other staff. At this time, CPK does not require the assistance of

specialized executives. Although, it was included in the budget projections and the amount set

aside is $10,000. An alternative, can be to assign some of those tasks to the salesperson and

compensate that individual using the budgeted salary. Lastly, it is not necessary to hire a special

consultant, but we have a budget of $5,000 in case it is needed in the future (Appendix 2.11).

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For the employees' compensation section, employees' were divided into two main

segments: critical salesman and salesmen. The critical salesman' wages are well above the

market average, and a 10% annual increase to their salary was budgeted. On the other hand,

salesman's wages were set a little lower than the market level (Appendix 2.12).

For the workers' compensation section, workers were divided into two main segments:

critical workers (brewmaster) and workers. The critical workers' wages are well above the market

average for their importance, and a 10% annual increase to their salary was budgeted. On the

other hand, worker’s wages were set at the market level (Appendix 2.13).

3. Application of Decision Support Tools

3.1 Selected Decision Support Tools for Functional Area #1

Decision Support Tool: SWOT Analysis

The SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis is a practical

analysis when determining the internal and external factors that affect a business. These four

quadrants include internal factors that your organization has “control over” and external factors

that your organization has “little or no control over” (Sarsby, 2016). The internal factors are

strengths and weaknesses and the external factors are opportunities and threats. The SWOT

analysis for CPK is described below:

Strengths

The strengths quadrant in the SWOT analysis define CPK’s competitive advantages. As a

well-established restaurant chain, CPK undoubtedly excels at maintaining a firm competitive

stand (CPK, n.d.). Some of the internal strengths that were identified are:

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● Product offering diversification because CPK would be providing more alcoholic

beverages than their existing cocktail menu.

● Prime location which allows CPK to be visible to a wider audience which helps with

marketing and branding purposes.

● CPK has a strong brand resonance, meaning that they are widely recognized and known

in the United States. One of CPK’s goals this year is to “increase brand awareness.” (PR

Week, 2019).

● CPK’s main focus is delivering quality service and products allowing customers to

associate CPK with these attributes.

Weaknesses

There are also a series of weaknesses present in this venture. These weaknesses are

especially important to determine since CPK may have to keep an eye on them in order to remain

competitive and improve on these areas. Some of the internal weaknesses are:

● Lack of experience in the craft beer industry means CPK will have to think of new and

innovative ways to market their new product offerings.

● Microbrewery expansion must be capped at a certain level due to limited retail space.

Opportunities

The opportunities in this analysis are those that will arise in the larger market. There are

multiple external opportunities present, these include:

● CPK currently has strong and beneficial relations with different partners. If they expand

into this business this could lead to future relations and collaborations with different

partners.

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● There are a great number of informational developmental opportunities in the industry.

Trade shows will be a great way to learn about these new opportunities and for this

reason CPK should invest in these events.

● Due to the upward trend and high popularity of microbreweries in the United States and

particularly in New England, customers will engage with CPK’s new products.

Threats

There are various threats that may pose harm to the project. Some of these are:

● There is a high risk of competition. There are a large number of breweries in

Massachusetts and in Boston. Some of the Boston BrewPubs and breweries are Cheeky

Monkey Brewing Co., Harpoon Brewery and Beer Hall, Trillium Brewing Co. In addition

microbreweries, CPK’s other competitors in the Prudential center are restaurants like The

Cheesecake Factory, Earl’s Kitchen and Bar, and Eataly.

Decision Support Tool: PESTEL Analysis

The PESTEL (Political, Economic, Social, Technological, Environmental, and Legal)

analysis method was utilized in order to evaluate various external factors that will affect this

business venture. The PESTEL analysis “examines a range of external factors that may affect an

issue or a problem. These factors cover a range of different aspects that may have some impact

on the issue either now or in the future” (Ratcliffe, 2009). Analyzing the positive and negative

components of the implementation of this BrewPub allows us to create a more precise and

concrete analysis.

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Political

In order to produce beer, the place has to comply with both federal and state to legally

produce, promote, and distribute alcoholic beverages. “In order to legally produce and sell beer

commercially, a brewer must be authorized to operate by obtaining both national and state

approval” (Law Offices of John P. Connell, P.C., 2015). Other factors to keep in mind are the

change in government regulations and taxes. In fact, “...the growth of small and micro-breweries

was facilitated by changes in government regulations and cuts in federal taxes for smaller

breweries introduced in the late 1970s” (Cabras & Higgins, 2018).

Economic

An important economic factor to consider is that this venture will bring more jobs and

therefore will generate more revenue in the area. Moving forward, seasonal factors, raw material

costs, and taxation inflation are other economic factors that could affect the business in both

positive and negative ways.

Social

An important social factor that could be a detriment to the success of the project is the

negative connotations surrounding the consumption of alcohol. For instance, it could lead to

some life-threatening illnesses if alcohol is abused. Also, individuals are more health-conscious

nowadays and tend to not indulge in high-calorie alcoholic drinks because they are trying to live

a healthier lifestyle. Lastly, some religions abstain from alcohol and do not promote its

consumption.

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Technological

The beer industry heavily relies on technology. Without technology, a microbrewery,

especially, will not be able to develop processes, complex flavors for their products, and unique

combinations to remain relevant and competitive in the beer market. Several technological

advances have been proposed. These will be covered in the innovation section but the most

important one is the rental of the solar water purifier. This will improve the quality of the water

and, in turn, will save energy expenses.

Environmental

There is no doubt that water is used in every step of the brewing process. Due to this,

water is a key element in the success of this venture. However, water shortage is a worldwide

issue. Beer is 90-95% water and “inside the average brewhouse, it takes seven gallons of water to

produce one gallon of beer” (Agnew, 2016). Because of this water usage will need to be

monitored and taken into account for future expansion.

Legal

There are several legal factors that come into play when analyzing the beer industry. For

instance, it is important to keep in mind that the Tobacco Tax and Trade Bureau issues “TTB

permits” (Law Offices of John P. Connell, 2015). These are all important factors to consider

before the implementation, since “the average processing time for the application is about 86

days and may include an on-site inspection of the proposed premises” (Law Offices of John P.

Connell, 2015). After approval, there are a series of brewery licenses in the state of

Massachusetts. Some of these are: Manufacturer of Wine and Malt Beverages license, Farmer

Brewery license, and Pub Brewery license (Law Offices of John P. Connell, 2015). When

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considering this venture, it is important to comprehend what each license entails and for which

one CPK should apply.

3.2 Selected Decision Support Tools for Functional Area #2

Decision Support Tool: Sensitivity Analysis

Sensitivity analysis is a way to help us know how much the variations that important

impacts on the result for a mathematical model have (Maverick, 2019). The price of the new

product: Zebra Special (BR01-10) is an important factor about the operation profit. Appendix 3.1

shows the variables that were input. First, ten types of beers were chosen as labels and market

research price in price sensitivity as value in values in input variable. Then, the input values from

minimum sensitivity price to maximum sensitivity price with these ten products were chosen.

Next, the profit before taxes as the label and $466,633 as value in the output variable, after 2%

was set as the step percent (shown in a spider chart in Appendix 3.2). According to the spider

chart, the profit of the ten products changes with the percentage of basic price. The slope of each

product is means how sensitivity with the percentage of basic price. The greater the slope, the

more sensitive the product is to price changes. Based on the spider chart, the most sensitive to

price change are products BR01-07 and BR01-08, and the least sensitive to sensitive to price

change which is BR01-10 and means the profit of the new product would not change too much

with the change of price. Also, according to the spider chart, the highest profit before taxes

almost around the 120% of the base except the BR01-10. Most products have the highest profit

when 120% of the base is increased and if the demand decreases if the price is over 120% of the

base.

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Decision Support Tool: What-If Analysis

What-if analysis is a way to set different budgets that each assumes a certain level of total

cost. According to Appendix 3.3, the original total fixed costs is $231,681, if we were to increase

it to $250,000, the break-even point will change to 4.28, and the revenue will be $344,031.

However, if we decrease the total fixed costs to $230,000, even though the revenue decreases to

$316,509, the break-even point will change to 3.93. Therefore, the total fixed costs should be

closely monitored and decreased to get a higher profit with lower break-even point.

On the other hand, Appendix 3.4 shows what break-even points changed with the selling

price per products. At first, we increased $0.50 for products BR01-01 to BR01-06, each $5.50

per unit, BR10-7 and BR01-08 increased to $2.00 and $1.90, and the BR01-10 increased to

$10.00. The break-even point changed to 3.04 and the revenue ended up being $298,511. On the

contrary, if we decrease $0.50 for products BR01-01 to BR01-06 and BR01-10, and decrease to

$1.10 for products BR01-07 to BR001-08, then the break-even point increases to $4.68 and the

revenue is $334,649, which is not a profitable change. Therefore, the selling price should be

closely monitored and increased to get a lower break-even point.

Lastly, it is important to note which break-even points changed with the variable costs

per unit (Appendix 3.5 shows those changes). After the variable cost was increased from $0.72 to

$0.92, the break-even point increased to 4.41, and the revenue to $354,850. However, decreasing

the variable cost to $0.62, would result in a break-even point of 3.77, and a revenue of $303,419.

Due to this, closely monitoring and decreasing the variable costs per unit to get a lower

break-even point is important.

22

3.3 Selected Decision Support Tools for Functional Area #3

Decision Support Tool: Break-Even Analysis

A break-even analysis was utilized to help us evaluate the decision. A break-even point

means the point of when the costs would equal total sales (“Break-Even Analysis,” n.d.). The

lower the break-even point, the more profit the pub will earn. After adjusting the cut-off point in

cycle seven, the break-even point is 4.25 with the sales volume of $334,848. Compared to the

break-even point in cycle six which was 4.85 with a sales volume of $342,365 (Appendix 3.6).

There is a slight increase in the break-even analysis. The result shows that we could start to earn

the profit after 4.25 month with fewer costs.

Decision Support Tool: Optimization Analysis

Moreover, optimization analysis was used to find the optimum value. By using this

analysis, the maximum profit was found by adjusting the price in market research. In the

optimization analysis, the data shows that the profit before taxes is $693,687 (Appendix 3.7).

The optimal price of BR01-01, BR01-02 is $4, BR01-03, BR01-04, BR01-05, BR01-06 is $3.5,

BR01-07 is $1.25, and BR01-08, BR01-10, BR01-11 is $1.28. Comparing the break-even point

in cycle six, the break-even point dropped from 4.85 to 4.25, which resulted in better sales

performance and increased profits.

3.4 Selected Decision Support Tools for Functional Area #4

Decision Support Tool: Break-Even Analysis

23

The break-even point shows the point when total cost equal to total revenue, which

means that there is no net gain or loss. The main purpose of break-even analysis is to figure out

the minimum output that CPK should exceed to gain profit.

In cycle six, we adjusted the number and payment increase rate in employees’ salaries,

utilities, marketing cost. According to break-even analysis the break-even point decreases from

6.18 to 4.85, fixed cost range decreases from $298,891 to $234,681, and total cost range

decreases from $436,039 to $342,365 (Appendix 3.8). According to these numbers, CPK should

sell $342,365 to cover the total cost. As a matter of fact, the performance in cycle six is better

and more profitable than the previous one.

Decision Support Tool: What-If Analysis

A what-if analysis is a way to plug in different scenarios and values to determine a range

of possible results, and find out the best decision for the business. Applying what-if analysis,

allows us to understand more about the impact on the break-even point.

The original total fixed cost is $234,681 among all of CPK’s products (Appendix 3.9). If

we increase total fixed costs to $250,000, the break-even point becomes 5.17, and the revenue

$364,714. If we decrease total fixed costs to $230,000, the break-even point lowers to 4.75, and

the revenue lowers to $335,536. Therefore, to lower the break-even point, in order to make more

profits, the total fixed costs should be decreased.

Another scenario is adjusting selling prices per products. According to Appendix 3.10,

we increased $0.4 for price per unit for each of the products. The price per unit of products

BR01-01 to BR01-06 becomes $5.4, BR01-07 and BR01-08 becomes $1.7, and BR01-10

24

becomes $5.9. The total fixed cost remained the same, but the revenue increased to $982,614 and

break-even point 3.93. On the other hand, if we decrease $0.5 for unit price for each of CPK’s

products, the revenue will lower to $677,280 and the break-even point to 6.85. In conclusion, to

slightly increase the selling prices for products, we can increase the total revenue with a lower

break-even point.

Lastly, the total fixed cost remained the same and the price per products while increase

and decrease the variable cost per unit (Appendix 3.11). The variable cost per units were

changed from $0.78 to $1.28, with an increase of 50 cents. The expense raise from $266,369 to

$436,039, and the break-even point increased from 4.85 to 6.85. By decreasing the variable cost

per unit to $0.38, the expense becomes $130,633 and the break-even point lowers to 3.93. To

sum up, by decreasing the variable cost per unit by 40 cents, the break-even point will be much

better than the original one, so decreasing the variable cost will get us a better result.

3.5 Selected Decision Support Tools for Functional Area #5

Decision Support Tool: SWOT Analysis

Strengths

● Employees are a company’s greatest asset. CPK is willing to invest in its people by

offering competitive salaries. For example, The compensations of both the salesperson

and part-time workers are well above the market benchmark salaries and take into

account a 10% annual growth rate which allows CPK to remain competitive within the

industry they are attempting to penetrate.

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● Well paid managers and workers with high competence will impact, improve, and reduce

service times to create a great customer experience.

● Hiring a beer master is beneficial for promoting CPK’s new product offerings in order to

attract more customers which boosts CPK’s bottomline.

Weaknesses

● Workers' compensation is a high operating expense given what competitors are paying

their employees. Based on the simulation, the salaries are over budget and could be

slightly adjusted to keep fixed costs down.

● Entry-level positions tend to have high turnover rates, which means CPK may need to

continually hire and train new part-time staff.

● Little to no opportunities for internal mobility can lead to dissatisfaction meaning

employees may leave in search of career advancement with another company or

competitor.

Opportunities

● Boston is not only the largest city in Massachusetts, but the largest city in New England.

Its population size ranks 23rd in the United States (“World Population Review,” 2019).

So, a large population is conducive to CPK’s efforts to replenish their staffing levels.

Threats

● Due to the fierce job market in the Boston area, excellent employees may be poached by

CPK’s competitors and staff turnover can negatively impact the development of CPK’s

venture.

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● Increasing costs of city living can impact the labor market and push employees to seek

lower cost accommodations outside the city, ultimately pushing the employee to quit

their job because the hassle and cost of their commute outweighs their income.

Decision Support Tool: Decision Tree

As the critical worker, a beer master is very important for the quality of CPK’s products,

so CPK should try to find the best brewmaster. In order to find the most suitable person with the

least cost, we consider two ways of recruitment.

One is to find a beer master with the help of a recruiting firm, for a fixed salary of

$4,000. The other is posting recruitment information on the job-hunting website, and the job-

hunting website determines the fees we pay according to the market conditions. If the market

conditions are favorable, CPK can quickly recruit talents at a cost of $2,000. If the market

conditions are unfavorable, CPK need to spend $3,000.

At the same time, CPK may also conduct a market survey and analyze the market

situation with the research report. That there is a 50% chance that the research report will be

favorable and a 50% chance that the research report will be unfavorable. Under the favorable

report, the probability of a good market is 0.9, while the probability of a bad market is 0.1.

However, if the report is unfavorable, the probability of a good market is 0.4, and the probability

of a bad market is 0.6. The research will cost $1,500.

In order to choose CPK’s best decision among these scenarios, we created a decision tree

(Appendix 3.12) that shows the possible consequences and calculates the expected monetary

value (EMV) to come up with a final decision.

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● Without research：

EMV (recruiting firm) = $4000

EMV (job-hunting website) = $2500

● With research：

Favorable report:

EMV (recruiting firm) = $4000 + $1500 = $5500

EMV (job-hunting website) = $2900 + $1500 = $4400

Unfavorable report:

EMV (recruiting firm) = $4000 + $1500 = $5500

EMV (job-hunting website) = $2400 + $1500 = $3900

CPK should choose the scheme with the lowest EMV. Through the calculation of the

decision tree, plus the research cost, CPK should use the job-hunting website to publish the

recruitment information, and not do the labor market research is the cheapest solution,which is

$2500.

4. Evaluation of the Results of the Business Simulation

4.1 Functional Area #1: Evaluation

A total of five marketing cycles were run in the business simulation (cycle one, cycle

two, cycle five, cycle eight, and cycle ten). In cycle one, Social Media and Website were added

to the marketing costs section (Appendix 4.3). In cycle one, the budget of Local Advertising was

lowered from $35,000 to $20,000 in order to add Social Media and Website to the marketing

costs section (Appendix 4.3). This is not because Local Advertising is not important but because

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distributing the budget amongst the three is key, especially since all are beneficial to the success

of CPK’s new business venture. Due to this, the total marketing costs increased from $38,000 to

$43,000.

Many important changes were made in cycle five in the marketing costs tab (Appendix

4.4). The budget of Trade Shows was increased from $3,000 to $20,000, Social Media from

$10,000 to $25,000, and Website from $10,000 to $50,000. The payment increase for years

FY-1, FY-2, and FY-2 was also increased for these three marketing costs. Additionally, Special

Offer (BR01-11) was added as a new retail product to the Product Name & Description section.

Other key changes made in cycle five were in the targeted market size (per product and FY)

section in order to meet 100% demand. We adjusted the demand for retail products only,

products BR01-01 to BR01-06 and product BR01-10.

The concluding budget for Local Advertising (cycle 12) in FY-1 is $20,000 with a 11%

increase in FY-2 and a 20% increase in FY-3. The budget for Trade Shows is $20,000 with a

11% increase in FY-2 and a 25% increase in FY-3. The budget for Social Media is $25,000 with

a 5% increase in FY-2 and a 12% increase in FY-3. The budget for Website is $50,000 with a

5% increase in FY-2 and a 10% increase in FY-3. These increases are due to the high expectancy

of consumers in FY-2 and FY-3. Our total estimated budget is $115,000 for FY-1, $123,150 for

FY-2, and $141,540 for FY-3 (Appendix 4.1). Overall, the series of iterations guided us to

produce reliable and profitable data. Evidently, cycle 12 was the most profitable.

4.2 Functional Area #2: Evaluation

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In cycles two and three, we adjusted the variable costs for products BR01-01 to BR01-09,

the total revenue increase from $2,236,276 to $2,782,1185, and the break-even point of revenue

decrease from $341,861 to $328,167, also the rate of return on investment increase from 4.49 to

4.82 meaning that we can recover the cost earlier. When comparing cycle four and cycle 12, after

adjusting the cost of labor from $0.26 to $0.20, the break-even point decreased to 4, and the

revenue increased to $3,017,857. Overall, it is beneficial to decrease the cost of labor and

variable cost per unit, and increase the selling price in order to get a higher profit with a lower

break-even point.

4.3 Functional Area #3: Evaluation

In operations management, the retail products’ cut-off point was adjusted in order to

match the demand of the market. In cycle six, products BR01-03, BR01-04, BR01-05, BR01-06,

BR01-10 had a high demand each year, the percentage of excess demand over total demand for

these products were all greater than 10%. The cut-off points for these products were lowered in

cycle seven, from 0.8 to 0.6. After the adjustment, only BR01-10 still has a higher excess

demand. However, the total profit before taxes is $1,310,788, which is increased by 20% from

$1,089,798 in cycle six. In the break-even analysis, the break-even points increased from 4.85 to

4.25, and the cost of sales decreases from $342,365 to $334,848, meaning that we could start to

produce a profit in a shorter period with a lower investment. Since the percentage of excess

demand for BR01-10 is still high, the targeted market size was adjusted for cycle eight.

Moreover, the optimization analysis gives us a better profit before taxes by discovering

the best value of the target products. By lowering the optimize price for all 10 products, the

30

profit before taxes increased by 60% from $428,453 to $693,687. In optimization analysis, it also

gives the recommendation of the targeted market size. For retail products, the market size is

17.26%, 16.16%, 12.97%, 12.09%, 12.45%, 13.03%, and 15.03% for BR01-01, BR01-02,

BR01-03, BR01-04, BR01-05, BR01-06, and BR01-10. For wholesale products, the market size

is 51.18% and 48.82% for BR01-07, BR01-08.

4.4 Functional Area #4: Evaluation

From cycle five to cycle six, the financial part in each of the categories were where we

mainly adjusted; including employees, utilities, supplies, rent, taxes, among others. Since the

main goal is to invest and implement a new microbrewery at CPK Prudential, promoting the

restaurant and its products, focusing on employees, and distributing of marketing costs should be

of great importance. Most of the employees’ expenses were eliminated however, there was a

greater focus on the salesperson and due to this, this individual will have a higher salary. In the

marketing costs, Social Media and Website were added, since focusing on advertising CPK and

its new products to target customers is crucial (Appendix 2.7).

After making all the changes in cycle six, the total net profit after taxes raises from

$540,094 in cycle five to $817,094, and the break-even point also moves from six to five

(Appendix 4.5). Moreover, from the application of What-If analysis, it can be concluded that by

decreasing the total fixed costs, increasing the selling prices for the products, and slightly

decreasing the variable costs, the microbrewery will head to a more profitable direction.

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4.5 Functional Area #5: Evaluation

In the part of HR management,we adjust the budget for labor cost,which include the

salary for office assistant, salesperson, executives and consultant(Appendix 2.11),and changed

employees' compensation: Critical Salesman & Salesman(Appendix 2.12);Changed workers'

compensation: Critical Workers & Workers (Appendix 2.13),besides,decreased the number of

people hired in workers.

After we reset the budget for labor costs, we can see the cost of labor each year in cycle

11 (Appendix 4.7)are less than those in cycle 10 (Appendix 4.6), and during fiscal year one to

fiscal year three, the total savings in labor cost can up to $68,942.

What's more,labor costs reached a lower level given the increase in revenue over the

progression of the simulation. This trend is visible within the finances given that profits in cycle

11 were at the highest while the employees year over year received successive salary increases

leading to an overall better workplace.

5. Conclusions and Recommendations

The implementation of this project requires thoughtful and strategic planning in order to

be successful. Implementation is the process of translating strategies and plans into actions to

achieve strategic goals and objectives (Olsen, n.d.). According to the project implementation

plan (Appendix 5.1), CPK will be ready to open the new BrewPub in the next five months. All

preparatory work including hiring employees, training employees, arranging transportation,

preparing production and distribution channels, etc. should be completed before the opening,

which will be on May 1st. In order to attract the attention of the customers and expand the

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influence of the bar, CPK should actively advertise in the surrounding areas. After the opening,

an evaluation of the results of the first quarter will be conducted to prepare for the next 12

months of operations. All project implementation details, including duration, start and end dates,

and predecessors are located in Appendix 5.1.

For CPK to execute this project, it is important to hire a skilled and passionate beer

master to create seasonal limited-edition beers as well as hard-working employees, such as a

salesperson and office assistant. CPK will utilize a rented solar water purifier to keep operating

costs low. Common beer types in addition to in-house beers such as Zebra Special (BR01-10)

and Special Offer (BR01-11) will be part of CPK’s product offerings. Moreover, the marketing

techniques and strategies will be kept up-to-date, matching current trends.

In the most profitable cycle (cycle 12), the break-even point is 4 (Appendix 5.2), which

means that total revenue will equal total expenses in the fourth month. Based on these

projections investors can be confident in the performance and success of CPK’s new business.

The total revenue in the first three fiscal years grew after 12 cycles. More specifically, the

revenue in FY-1 is $965,690, $973,262 in FY-2, and $1,078,905 in FY-3. The gradual and stable

increase of profits is an indicator of the success of the new business. Ultimately, CPK should

invest in a new BrewPub, providing not only pizzas and cocktails, but also offering a variety of

craft beers to cater to the needs of their target customers.

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Appendices

Appendix 1: Introduction

Appendix 1.1

Appendix 2: Methodological Framework

Appendix 2.1

37

Appendix 2.2

YEAR RETAIL (PINTS) WHOLESALE (PINTS)

FY 1 129,057 239,677

FY 2 133,090 247,167

FY 3 145,189 269,636

Appendix 2.3

Appendix 2.4

38

Appendix 2.5

Appendix 2.6

Appendix 2.7

39

Appendix 2.8

Appendix 2.9

Appendix 2.10

Appendix 2.11

<Cycle 11>

40

Appendix 2.12

<Cycle 11>

Appendix 2.13

<Cycle 11>

41

Appendix 3: Application of Decision Support Tools

Appendix 3.1

Appendix 3.2

42

Appendix 3.3

Appendix 3.4

43

Appendix 3.5

Appendix 3.6

44

<Cycle 6>

<Cycle 7>

Appendix 3.7

45

Appendix 3.8

<Cycle 5>

<Cycle 6>

Break-Even Analysis

46

Appendix 3.9

< Original total fixed costs >

< Increase/Decrease total fixed costs >

47

Appendix 3.10

< Original selling prices per products >

< Increase/Decrease selling prices per products >

Appendix 3.11

< Original variable cost per unit >

< Increase/Decrease variable cost per unit >

48

Appendix 3.12

49

Appendix 4: Evaluation of the Results of the Business Simulation

Appendix 4.1

Appendix 4.2

Appendix 4.3

50

Appendix 4.4

Appendix 4.5

Appendix 4.6

<Cycle 10>

51

Appendix 4.7

<Cycle 11>

Appendix 5: Conclusions and Recommendations

Appendix 5.1

52

53

Appendix 5.2