Sample Case Study
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Report to the Board of Management of Yummy Foods Pty Ltd
Yummy Foods Pty Ltd have experienced a disappointing performance from their Ice Cream And Chocolate (ICAC) division in the past financial year. The ICAC division manufactures and distributes the Kold Ice Cream and Big Brown Chocolate Bars range in NSW and WA.
Despite increased sales, the division posted a loss of $20,000 in the last financial year. Yummy Foods management are considering closing the division and have asked Affirmative Business Solutions for their recommendation.
The 2001-2 Annual Report indicates that the ICAC division produced 200,000 ice creams and chocolate bars, bringing in revenue of $250,000. Cost of Goods Sold was $150,000, but high overheads, mainly in distribution, resulted in an overall loss of $20,000. For reporting purposes, total overheads had been equally allocated to all units sold. The results are summarised in Table 1.
|
|
Chocolates |
Ice Cream |
Total |
|
Sales ($) |
100,000 |
150,000 |
250,000 |
|
Cost of Goods Sold ($) |
50,000 |
100,000 |
150,000 |
|
Overheads ($) |
60,000 |
60,000 |
120,000 |
|
Profit /-Loss ($) |
-10,000 |
-10,000 |
-20,000 |
|
|
|
|
|
|
Key Performance Indicators |
Chocolates |
Ice Cream |
Total/Average |
|
Units Sold |
100,000 |
100,000 |
200,000 |
|
Selling Price per Unit ($) |
1.00 |
1.50 |
1.25 |
|
COGS per Unit ($) |
0.50 |
1.00 |
0.75 |
|
Overheads per Unit ($) |
0.60 |
0.60 |
0.60 |
|
Profit /-Loss per Unit ($) |
-0.10 |
-0.10 |
-0.10 |
Table 1: Extract from financial results of the Ice Cream & Chocolate (ICAC) Division.
Note that Overheads of $120,000 have been equally distributed over all units sold.
Affirmative Business Solutions suspected that allocation of overheads equally to all items sold may be obscuring relevant cost relationships. It was decided to investigate the overhead costs by product and by state. Most costs classified as ‘overheads’ comprised distribution costs. It was found that due to special refrigeration requirements of the Kold Ice Creams, distribution charges were higher than for the chocolate bars. It was further found that due to greater distances in WA, higher distribution overheads were incurred than in NSW. By careful analysis, and accurate assignment of distribution costs to cost drivers, it was possible to determine profitability by product and by state, as shown in Table 2.
|
|
Chocolates |
Ice Cream |
TOTAL | ||
|
|
NSW |
WA |
NSW |
WA | |
|
Sales ($) |
60,000 |
40,000 |
120,000 |
30,000 |
250,000 |
|
Cost of Goods Sold ($) |
30,000 |
20,000 |
80,000 |
20,000 |
150,000 |
|
Overheads ($) |
10,000 |
10,000 |
20,000 |
80,000 |
120,000 |
|
Profit /-Loss ($) |
20,000 |
10,000 |
20,000 |
-70,000 |
-20,000 |
|
|
|
|
|
|
|
|
|
Chocolates |
Ice Cream |
TOTAL /AVERAGE | ||
|
Key Performance Indicators |
NSW |
WA |
NSW |
WA | |
|
Units Sold |
60,000 |
40,000 |
80,000 |
20,000 |
200,000 |
|
Selling Price per Unit ($) |
1.00 |
1.00 |
1.50 |
1.50 |
1.25 |
|
COGS per Unit ($) |
0.50 |
0.50 |
1.00 |
1.00 |
0.75 |
|
Overheads per Unit ($) |
0.17 |
0.25 |
0.25 |
4.00 |
0.60 |
|
Profit /-Loss per Unit ($) |
0.33 |
0.25 |
0.25 |
-3.50 |
-0.10 |
Table 2: Detailed analysis of profitability of the ICAC Division by product and state pinpoints the problem as being the Ice Cream sector in WA.
4.0 Conclusions and Recommendations
· It is apparent from the detailed analysis that Ice Cream in WA is the only loss-making sector of the division.
· The ICAC division should not be shut down. This would be an unnecessary waste of a potentially profitable division.
· Consideration should be made to withdraw Kold Ice Cream from the WA market. As shown in Table 3, performance for the ICAC division can be expected to turn around from a $20,000 loss to a $50,000 profit.
|
|
Chocolates |
Ice Cream |
TOTAL | ||
|
|
NSW |
WA |
NSW |
WA | |
|
Sales ($) |
60,000 |
40,000 |
120,000 |
|
220,000 |
|
Cost of Goods Sold ($) |
30,000 |
20,000 |
80,000 |
|
130,000 |
|
Overheads ($) |
10,000 |
10,000 |
20,000 |
|
40,000 |
|
Profit /-Loss ($) |
20,000 |
10,000 |
20,000 |
|
50,000 |
|
|
|
|
|
|
|
|
|
Chocolates |
Ice Cream |
TOTAL /AVERAGE | ||
|
Key Performance Indicators |
NSW |
WA |
NSW |
WA | |
|
Units Sold |
60,000 |
40,000 |
80,000 |
|
180,000 |
|
Selling Price per Unit ($) |
1.00 |
1.00 |
1.50 |
|
1.22 |
|
COGS per Unit ($) |
0.50 |
0.50 |
1.00 |
|
0.72 |
|
Overheads per Unit ($) |
0.17 |
0.25 |
0.25 |
|
0.22 |
|
Profit /-Loss per Unit ($) |
0.33 |
0.25 |
0.25 |
|
0.28 |
Table 3: Despite a drop in total sales, an improvement in profitability can be expected following exit of the WA Ice Cream market. Compare forecast total profit of $50,000 with 2001-2 loss of $20,000 in Tables 1 and 2.