QuestionMerry & Mellow Pub Ltd.

Merry & Mellow Pub Ltd.
Merry & Mellow Pub Ltd. (M&M) operate a brew pub—a pub which brews beer in a micro-brewery on its premises. M&M brews English-style beer from malt, hops, and yeast imported from brewery suppliers in England. Its equipment was imported from Germany.
The business is the brainchild of four partners who contributed $100,000 as equity to the business. The remaining $400,000 is financed by debt instruments. Of the debt financing, $200,000 was raised through convertible debentures sold to investors, most of whom are acquaintances and family of the partners. Of the remaining $200,000, $100,000 is a repayable grant from a government agency, and $100,000 is a mortgage held by the brewing equipment manufacturer on the equipment. The average cost of this debt capital is 12%.
Each of the partners has taken a role in the business, although to a different degree. Two are involved daily and draw a salary. John Rumbol is the business managers. He has a long history as a manager in the restaurant and hospitality industry. Alvin Smale is the Brewmaster with extensive experience in the English brewing industry. He makes $60,000 per year. Andy Bittrov is an accountant who prepares the business statements and manages the banking. The assistant manager does the daily accounting, which is primarily entering whatever data is not collected automatically into the computer and balancing computer summary data to cash. The manager closes up and makes bank deposits, although this task is occasionally handled by the assistant manager as well. The fourth partner is Joanne Van Wine who operates a computer business and has selected and customized the business’ information and accounting systems with some professional input from Andy. Altogether, management and administrative staff—excluding the Brewmaster, Alvin—are paid $19,000 per month.
The main attraction and most distinctive feature of the pub is specialty beer, brewed using special and secret recipes developed by Alvin. Because of its role as the centrepiece of the business, the quality of the beer is of utmost importance to the long-term success of the enterprise. The malt, hops, and yeast used are imported form a brewery supplier in England, which specializes in the supply of these materials to small independent brewers. Alvin spent four months in England perfecting his beer recipes by working with the English company’s experts to develop the individual ingredients which are maintained for the M&M account alone. The English company’s costs for malt, hops, and yeast—costing M&M $9,500—are $7,500. M&M’s shipping and duty cost for that same amount is $500.
The malt, hops, and yeast are shipped to M&M four times per year. The size of the order must be confirmed three months in advance of the desired delivery date. The shipment is cleared through customs by one of the partners—usually Alvin—then inspected and put into cool storage inventory until needed. All ingredients are dated and rotated to avoid spoilage. Ingredients have a six-month shelf life. Alvin estimates that the average monthly use of these items is $40,000.
Alvin schedules the monthly production of beer according to customer and pub employee feedback regarding type of beer and quantities favoured, as well as for any special celebration or promotions planned. Capacity is also maintained for testing any new recipes. Alvin also works from sales data as reported by the computerized records.
As a good Brewmaster should, Alvin and his assistant thoroughly clean the stainless steel tanks before mixing each batch. It takes an hour for them to thoroughly clean a tank. He
then combines ingredients according to the selected recipe, dates the batch, and monitors it daily for temperature, taste, impurities, and expected time to completion. The beer is transferred between specialized tanks as it moves through the sequential fermentation and filtration processes. When completed, the batch is transferred to cold storage tanks from where it can be put directly on tap to the pub. As the beer is unpasteurized, any unsold beer over 30 days old must be destroyed. It is of the utmost importance that the stainless steel tanks be clean, and that the purity, taste, and temperature of the beer be continually monitored. The Provincial Liquor Control Board and Board of Health require the strictest quality control. The quantities, date of production, type of beer, and so on must be kept for these officials, for federal sales tax calculations, and for management purposes.
The production of a batch of beer takes from 10 to 14 days. Two different batches are normally in preparation at one time—utilizing four fermenting tanks. Each batch makes about 50 kegs of beer. Sales of lager average about 25 kegs per week, ales 35 kegs per week, and bitter about 30 kegs per month. A batch of ale requires 10 days, lager 12 days, and bitter 14 days. Bitter, served warmer than the ales and lagers, has proven to be a novelty item for the pub’s Canadian clientele but has attracted a regular group of nostalgic old country drinkers to the pub. The brewery makes one type of lager and two types of ale, which sell equally well.
Miscellaneous monthly costs for the brewery are $9,000 which includes $2,000 for water, $2,000 for utilities, $4,000 for labour, and $1,000 for supplies and maintenance. Depreci

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