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Fine Foods powerpoint
Fine Foods, Inc. Jessica Beck Cochran Derrick Payne Dary Phanthavong Kolby Wright Background of Fine Foods, Inc. Producer of a wide range of food products Most products are packaged for end-consumption and sold through supermarkets, convenience shops, and other similar outlets. Items are sold in different sizes: individual, half-gallon, or in bulk Products are pre-packaged goods and are not fresh products. Organization of the Fine Foods, Inc. Owned by Great Plains Capital Great Plains gives Fine Foods control over management, product selection, performance evaluation, etc. Strategic Management Units, based on the markets served SMU1 • Supermarkets SMU2 • Institutional customers • Special Orders SMU3 • Governmental organizations Production Process Raw Materials Prep Preliminary Cooking Additional Ingredients Added Final Cooking Processing and Packaging Shipped to the Customer Meet Kay Smith Manager of SMU2 Believes that her unit is being allocated too much product cost due to Special Orders. Unit morale is low due to low performance evaluations based on operating profit. What’s the issue? ….. SPECIAL ORDERS Constitute 2% of total revenues for Fine Foods Almost all special orders are for product MP and are to a food distributor in Mexico. MP is shipped unbranded for sale in Mexico and is frozen in 10-pound packages Product MP can be frozen for up to a year and is flexible to meet special orders large inventory Product MP Cost allocation of MP is currently negatively affecting SMU2 and its operating profit MP sales are a significant portion of SMU2’s total sales, as opposed to the other units Comes from the same raw materials as many other the other products Direct Costs include raw materials, packaging materials, and direct labor salaries Variable Costs include electricity, steam, water, and warehouse costs Fine Foods, Inc. uses activity based costing to allocate fixed production costs Steam boilers, building maintenance, vehicles, and sanitation costs are allocated based on net or gross weight Product MP (cont.) Remaining overhead is allocated by a fixed percentage, weight, labor time, and/or production time Special Orders – total monthly freight out is allocated by the weight of the product shipped SMU1 and SMU2 Media and Sales promotion costs are currently allocated to product groups and individual products based on weight of products sold Sales and Marketing costs are allocated based on sales volume Majority of fixed costs are allocated based on weight This is a problem for SMU2 because of product MP MP is a very dense, bulky and heavy product, resulting in its receiving of a majority of fixed costs These costs are excessive and reflect negatively on SMU2’s operating profit Proposed Recommendations Find a cost driver besides weight For example: time and miles traveled would more accurately reflect costs for steam boilers and vehicles Allocate a portion of fixed costs to other units SMU3 could be included in the allocation of sales and marketing costs, as well as media and sales promotion costs This would increase my contribution margin to a more accurate number while minimally affecting the other units’ profits Current Benefits of Special Orders Creates a steady work flow SMU2 only accepts special orders when the contribution margin (CM1) is positive CM1 includes Variable Manufacturing Cost, Fixed Manufacturing Costs, and Freight Out Accepted at idle times in business Recommended Changes for Special Orders Reconsider whether these sales are really special orders Remove Fixed Manufacturing Costs from CM1 Would allow for more Special Orders Remove freight out from the price of MP Cost of MP will decrease Performance Evaluation Responsibility centers: Cost centers Revenue centers Profit centers Performance Evaluation Contribution margin= sales price – variable costs per unit Operating profit= operating revenues - operating costs Return on Investment (ROI)= After-tax income Divisional assets Performance Evaluation Residual Income= After-tax income – (cost of capital X divisional assets) Economic Value Added (EVA®)= adjusted annual after-tax income – adjusted total annual cost of capital Performance Evaluation Agency costs- cost created conflict exists between individual/department intentions and what is best for the company Agency costs for Fine Foods? Performance Evaluation at Fine Foods Departmental level (SMU) Operating Profit Contribution Margin 1 Gross Sales (Standard discounts) (Activity discounts) (Special discount activities for customers) Net Sales (Variable manufacturing cost) (Fixed manufacturing cost) (Freight out) Contribution Margin 1 Contribution Margin 2 Contribution Margin 1 (Media) (Sales promotion) Contribution Margin 2 Contribution Margin 3 Contribution Margin 2 (Marketing and sales) Contribution Margin 3 Contribution Margin 4 Contribution Margin 3 (Top management) (Business administration) (Information systems) (Human resources) (Supply chain) (Production) (External logistics for finished goods) (Mark up- Manufacture expenditures) (Other fixed costs) Contribution Margin 4 Operating Profit Contribution Margin 4 (Structural costs) (Total depreciation) Operating Profit Issues with Operating Profit Calculation Fixed costs? Period costs? Recommendations Add nonfinancial measurements Replace operating profit CM1 ROI or Residual Income Conclusions Performance evaluation can cause agency costs For Fine Foods, performance evaluation measurements led to unfair cost allocation
