The breakeven equation

Question

Hey community, could someone help me understand the breakeven equation used in the solution.

USD (3.0m – 0.5m) / ((USD 225/barrel - $190 / barrel)/2) = 143,000 barrels.

What does the $190/barrel represent?

Cheers, thank you

Answer 1

Hi there,

in this part of the case, you are comparing the two options of selling the brewery to JBI, in which case ABC would get $3 million right away with nothing further to do, versus partnering with BBC. So the intention would be to determine the number of barrels (and associated timeline) that would have to be produced by ABC under the BBC partnership to reach the same $3 million profit for ABC - and to assess whether that is reasonable.

The equation you referenced is based on the BBC partnership stipulations illustrated in Exhibit 4. They claim 20% of the brewery capacity for themselves (which corresponds to 100k barrels). This means that everything ABC would be producing would be on top of that. In Exhibit 5, you can see that the production cost per barrel is at $190 for the production volume range of 100-250k barrels. ABC can sell a barrel for $225 (also in Exhibit 5). So in order to get the profit, you subtract the cost from the revenue. However, ABC will have to share half of their profits with BBC, hence you need to divide by 2. Using all of these parameters and boundary conditions, you will arrive at the breakeven equation for this specific comparison.

I hope this clarifies the situation and the thought process behind it. Feel free to message me directly in case of further questions.

Best