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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.

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Fine foods inc

Fine Foods, Inc.

Jessica Beck Cochran

Derrick Payne

Dary Phanthavong

Kolby Wright

Background of fine foods inc
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
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

Meet kay smith
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
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
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
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
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
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
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
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
Performance Evaluation

  • Responsibility centers:

    • Cost centers

      • Revenue centers

        • Profit centers

Performance evaluation1
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 evaluation2
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 evaluation3
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
Performance Evaluation at Fine Foods

  • Departmental level (SMU)

  • Operating Profit

Issues with operating profit calculation
Issues with Operating Profit Calculation

  • Fixed costs?

  • Period costs?


  • Add nonfinancial measurements

  • Replace operating profit

    • CM1

    • ROI or Residual Income


  • Performance evaluation can cause agency costs

  • For Fine Foods, performance evaluation measurements led to unfair cost allocation