Hi, would be super glad if somebody could help me out here. I don't fully understand how the profit per barrel in the partnership, e.g. at 50'000 barrels is 17.5. Wouldn't it still be a loss at that point? Also, how did we arrive at the estimate of 5-6 years until breakeven?

Hi there,

in the partnership agreement, two stipulations are made that matter here as per Exhibit 4:

1. BBC guarantees a 20% capacity utilization which means that the first 100,000 barrels in this brewery are produced by BBC as a base load
2. ABC has to evenly share their profits from the beer they are brewing with BBC

Since BBC provides the base load of 100k barrels, any barrel that ABC is producing will be in the 100-250k production range on the cost curve (Exhibit 5) and require $190 to produce. ABC can sell their beer for $225 per barrel (also Exhibit 5). 

Profit per barrel (total) = $225 - $190 = $35

However, ABC has to share half of the profit with BBC which leaves $35/2 = $17.5

The 5-6 year timeframe for break-even is the result of an assumed ramp-up period for ABC in their production. Since they have no experience with large scale brewing, it would be unreliastic to assume that they could handle as large a quantity as 50k barrels right out of the gate. Here it was therefore assumed that such a ramp-up would happen gradually over several years. You can obviously assume a steeper ramp-up or a slower one. The exact timing isn't that relevant for the solution, but the thought counts.

I hope this answers your questions. Feel free to message me directly in case you have any follow-ups.

Best

Hey there,

Recapping some facts:

• Annual capacity of ABC's brewery is 500,000 barrels
• BBC guarantees that they would guarantee 20% capacity utilisation (meaning 500,000 * 20% =100,000 barrels).
• The selling price is $225
• The associated cost with 100,000 barrels (based on exhibit 5) is $190

So the Profit per barrel would be $225 - $190 =$35

But since ABC has to equally share profits with BBC, we divide this by 2, meaning $35 / 2 =$17.5

Hope that helps!

All the best

hey!

The profit per barrel in a partnership, like the 17.5 at 50,000 barrels, typically refers to the net profit after covering fixed and variable costs, meaning it's the amount left after expenses. Even at that point, you might still be at a loss overall, depending on the initial investment and ongoing costs. The 5-6 years to breakeven is an estimate of how long it will take for total revenue from barrel sales to cover the initial costs, factoring in the expected production rates, costs, and market conditions over that period.

Hope that helps! Alessa