1. Calculate the amount of the bonus pool available under the existing bonus plan. How much would each manager get if that were applied to 2009 results?

2. We want to break down the profit variance into separate components. Part of the reason for this analysis is to determine how profits changed due to factors that are under the control of management, and how profits changed due to factors outside the control of management. Why is this distinction important for performance measurement?

3. We can divide the various differences into two broad categories: Competitive Effectiveness and Operational Efficiency. Competitive effectiveness can be measured by 4 variances: Temperature, Market Share (excluding transfers), Sales Mix, and Product Price. For both the French region and the Italian region (we will look at Spain later), calculate the following:
   1. What is the standard contribution per liter of product? (Standard contribution is the budgeted contribution margin divided by the budgeted volume in liters.)
   2. How much additional product was sold due to the change in average temperature? What affect did this have on profitability?
   3. Market share variance is measured by the change in total volume of product sold, times the standard contribution. What affect did this have on profitability?
   4. The budget plan called for 10% of revenue to come from specialty products. What was the actual % of revenue that came from Specialty Products? This calculation is challenging, so I will give you the net effect. For the Italian region, this increased profits by 2,000 Euro. For the French region, this decreased profits by 59,000 Euro. Explain why the shift in product mix between ice creams and specialty products would cause the profit to change.
   5. How much of the change in profit came about due to the product price being different? Measure this by looking at the actual sales revenue compared to the expected revenue based on planned prices and actual volumes.

4. The other category of variances, operational efficiency variances, are calculated by comparing the inputs of the raw materials and labor hours compared to the standards for each. Again, the calculations can be challenging, so I am providing the variance amounts for you. For the French region, the operational efficiency variances reduced the profit by 187,000 Euro. For the Italian region, the operational efficiency variance increased profit by 31,000 Euro.

5. There are some miscellaneous variances as well, including the corporate allocation for both regions. For just the French region, there was the effect of the shipments to Spain and the new delivery business. Input these amounts from the case exhibits to the worksheet.

6. The next task for you is to complete the chart found in the posted Excel file. It is the worksheet titled 2009 Performance. Each of the highlighted cells need to be filled in, either with the previous calculations, data from the other exhibits, or new calculations for this page. Note that the chart is asking for the changes to profit as a result of comparing the budget to the actual results. Each input should reconcile the total difference from planned profit to actual profit. When you include this chart in your final report, do not include the entire workbook. Just put this page in your report, likely as an appendix item.

7. Next, identify each variance in the chart as to whether the manager had control over it, or if it was something beyond his control. Determine the operating performance of the manager based on the items he could control. Comment on the operating performance of each manager using this analysis as a base for discussion.

8. Discuss the manner in which the transfer price was determined. Was it a fair way to determine the cost of the transfer? What other methods would you consider? Who has a vested interest in the transfer pricing calculation? Does corporate care? Do the different divisions care?

9. Discuss the strategic implications of the French Divisions expanding side business of deliveries. List at least two benefits of doing this and at least two negatives that could happen if this business were expanded.

10. Discuss what the corporate president should do with the Spanish division in regards to the performance evaluation. Calculate a few of the variances and ratios to support your recommendation as to whether the manager did a good job with the situation he was dealing with. How should a manager with an unusual situation such as faulty machinery be evaluated?

Jacques exercised control of the regions through a profit planning system. The profit plan covered the upcoming fiscal year which began on January 1. In November and December, each region prepared and submitted their initial profit plan to the central office. Jacques used the profit plan to discuss and supervise the expansion strategy of each region and to make sure that enough cash would be generated to support the company's new corporate ventures. The final phase of the profit planning process was a top management meeting which brought together Jacques, the three regional vice-presidents, and the finance and technical officers to discuss new growth opportunities. A lot of time and face-to-face contact was devoted to the profit plan and, once approved, it was the guiding tool to monitor and evaluate performance. During the summer months, each region generated a profit statement every two weeks that Jacques reviewed to detect major problems. In addition, Jacques spent a week in each region to "get a feel for the market." At the end of October, another top management meeting occurred to learn from the experiences over the past year and to schedule winter activities to prepare for the next season. In early December, Jacques handed bonus checks to the three regional managers. Top line revenue goals for the upcoming year were established using past growth rates and the market expectations of Jacques and the regional managers. Exchanging knowledge and experiences was a key element in shaping the growth assumptions of the profit plan. For 2009, the expected volume growth was 9% for the French region, 10% for the Spanish region, and 12% for the Italian region. Since 2005, when Compagnie du Froid introduced its first specialty product-sophisticated ice cream flavors made with prime quality ingredients, the strategy had been to emphasize these specialties that enjoyed higher margins and less intense competition. This strategy became operational through the profit plan: Jacques set ambitious goals for the percentage of sales volume coming from specialties for each of the regions. Standard selling prices and manufacturing costs were based on last year's actuals adjusted for any expected contingencies. Efficiency standards assumed that manufacturing would improve its year-to- year performance based on learning and better equipment. Finally, Jacques believed that the business should compensate shareholders-himself, his brothers and sisters, and top managers in the company-for the risk of tying up their capital in the business. Thus, he expected a reasonable return on shareholders' investment. His reference point was 18% return-on-investment before taxes. Exhibit 1 illustrates the standards used to design the profit plan for one of the three regions. France Jean Pinoux was the manager of the French region. He was promoted to this position in 2007 when Pierre Giraux, the previous manager, took over the lagging Italian operation. Jean had started as a sales representative, then advanced to be responsible for production, and finally became division manager. Jacques was pleased with Jean's performance (see Exhibit 2). His profits were above budget, and sales had increased almost 20% over the previous year. Jean had invested a lot of his time in managing the expansion into the west coast of France, negotiating with new vendors and suppliers, and arranging distribution of the product. If all this effort had paid off in 2009, the profits would have been even higher, but Jacques knew that they would have to wait several years to get the full benefits from this investment. Exhibit 1 Examples of Standards for the 2009 Profit Plan (Spanish Region) Standards Percentage of volume from specialties Spain 10% Selling prices in Euros) Ice-cream (per litre) Specialties (per litre) 4.42 8.13 Manufacturing costs (in Euros) Dairy ice-cream (per litre) Other ingredients ice-cream (sugar, flavor, etc. per 100 grams) Other ingredients specialties (sugar, flavor, etc. per 100 grams) Labor (wage per hour) Labor hours ice-cream (litres per hour) Labor hours specialties (litres per hour) 2.61 1.51 2.12 8.13 107.20 11.04 72% Volume Dairy ingredients-ice-cream (% of volume) Other ingredients ice cream (grams per litre) Dairy ingredientsspecialties (% of volume) Other ingredientsspecialties (grams per litre) 48 93% 73 Exhibit 3 Italian Region, 2009 Results Variance Profit Plan Volume Euros ('000) (000) Actual Volume Euros (000) (000) Sales Data Sales ice-cream (volume in litres) Sales specialties (litres) Total Sales 2,453 272 2,725 10,967 2.232 13,199 2,480 276_ 2,756 11,106 2.253 13,359 139F 21 F 160 F Cost of Goods Sold Cost ice-cream Dairy ingredients (litres) Other ingredients (100 gr.) Labor (hours) 1,864 1,275 33.10 4,963 1,885 300 1,895 1,296 36.03 4,986 1,932 328 (23) (47) (28) U U U 257 Cost specialties Dairy ingredients (litres) Other ingredients (100 gr.) Labor (hours) Contribution margin 259 196 24.24 689 425 220 4,717 197 23.29 676 430 212 4,795 T TC T T Other Costs Supervision, energy, maintenance, ... Depreciation Operating margin 1,142 109 3,466 1,135 109 3,551 T Selling and Administrative Expenses Delivery expenses Depreciation of trucks Selling expenses Advertising Administrative salaries and expenses Rent Allocated central office expenses Profits before Interest and Taxes 329 198 314 1,328 558 122 158 459 315 198 344 1,288 574 122 TC c TCC T 193 517 Identifiable Assets Cash (average) Accounts Receivable (average) Plant and equipment (net of depreciation 3,200) Total identifiable assets 94 377 2.763 108 357 2,764 3.234 3.229 lo Conditions for tourism Average summer temperature 29.7C 29.8 C Exhibit 5 2009 Ice cream Transfers between France and Spain Ice-cream Cost of ingredients Cost per litre Total (in '000 Euros) 603 Volume transferred (in '000 litres) Actual Costs (in Euros) Dairy Ingredients Other Ingredients Labor 2.76 1.56 1.98 0.69 0.09 1,194 416 0.09 57 Allocated Fixed Costs (in Euros) Other costs Depreciation S&A expenses 0.46 0.09 0.04 5% profit margin 0.17 Total transfer price 3.53 2,126 Jacques exercised control of the regions through a profit planning system. The profit plan covered the upcoming fiscal year which began on January 1. In November and December, each region prepared and submitted their initial profit plan to the central office. Jacques used the profit plan to discuss and supervise the expansion strategy of each region and to make sure that enough cash would be generated to support the company's new corporate ventures. The final phase of the profit planning process was a top management meeting which brought together Jacques, the three regional vice-presidents, and the finance and technical officers to discuss new growth opportunities. A lot of time and face-to-face contact was devoted to the profit plan and, once approved, it was the guiding tool to monitor and evaluate performance. During the summer months, each region generated a profit statement every two weeks that Jacques reviewed to detect major problems. In addition, Jacques spent a week in each region to "get a feel for the market." At the end of October, another top management meeting occurred to learn from the experiences over the past year and to schedule winter activities to prepare for the next season. In early December, Jacques handed bonus checks to the three regional managers. Top line revenue goals for the upcoming year were established using past growth rates and the market expectations of Jacques and the regional managers. Exchanging knowledge and experiences was a key element in shaping the growth assumptions of the profit plan. For 2009, the expected volume growth was 9% for the French region, 10% for the Spanish region, and 12% for the Italian region. Since 2005, when Compagnie du Froid introduced its first specialty product-sophisticated ice cream flavors made with prime quality ingredients, the strategy had been to emphasize these specialties that enjoyed higher margins and less intense competition. This strategy became operational through the profit plan: Jacques set ambitious goals for the percentage of sales volume coming from specialties for each of the regions. Standard selling prices and manufacturing costs were based on last year's actuals adjusted for any expected contingencies. Efficiency standards assumed that manufacturing would improve its year-to- year performance based on learning and better equipment. Finally, Jacques believed that the business should compensate shareholders-himself, his brothers and sisters, and top managers in the company-for the risk of tying up their capital in the business. Thus, he expected a reasonable return on shareholders' investment. His reference point was 18% return-on-investment before taxes. Exhibit 1 illustrates the standards used to design the profit plan for one of the three regions. France Jean Pinoux was the manager of the French region. He was promoted to this position in 2007 when Pierre Giraux, the previous manager, took over the lagging Italian operation. Jean had started as a sales representative, then advanced to be responsible for production, and finally became division manager. Jacques was pleased with Jean's performance (see Exhibit 2). His profits were above budget, and sales had increased almost 20% over the previous year. Jean had invested a lot of his time in managing the expansion into the west coast of France, negotiating with new vendors and suppliers, and arranging distribution of the product. If all this effort had paid off in 2009, the profits would have been even higher, but Jacques knew that they would have to wait several years to get the full benefits from this investment. Exhibit 1 Examples of Standards for the 2009 Profit Plan (Spanish Region) Standards Percentage of volume from specialties Spain 10% Selling prices in Euros) Ice-cream (per litre) Specialties (per litre) 4.42 8.13 Manufacturing costs (in Euros) Dairy ice-cream (per litre) Other ingredients ice-cream (sugar, flavor, etc. per 100 grams) Other ingredients specialties (sugar, flavor, etc. per 100 grams) Labor (wage per hour) Labor hours ice-cream (litres per hour) Labor hours specialties (litres per hour) 2.61 1.51 2.12 8.13 107.20 11.04 72% Volume Dairy ingredients-ice-cream (% of volume) Other ingredients ice cream (grams per litre) Dairy ingredientsspecialties (% of volume) Other ingredientsspecialties (grams per litre) 48 93% 73 Exhibit 3 Italian Region, 2009 Results Variance Profit Plan Volume Euros ('000) (000) Actual Volume Euros (000) (000) Sales Data Sales ice-cream (volume in litres) Sales specialties (litres) Total Sales 2,453 272 2,725 10,967 2.232 13,199 2,480 276_ 2,756 11,106 2.253 13,359 139F 21 F 160 F Cost of Goods Sold Cost ice-cream Dairy ingredients (litres) Other ingredients (100 gr.) Labor (hours) 1,864 1,275 33.10 4,963 1,885 300 1,895 1,296 36.03 4,986 1,932 328 (23) (47) (28) U U U 257 Cost specialties Dairy ingredients (litres) Other ingredients (100 gr.) Labor (hours) Contribution margin 259 196 24.24 689 425 220 4,717 197 23.29 676 430 212 4,795 T TC T T Other Costs Supervision, energy, maintenance, ... Depreciation Operating margin 1,142 109 3,466 1,135 109 3,551 T Selling and Administrative Expenses Delivery expenses Depreciation of trucks Selling expenses Advertising Administrative salaries and expenses Rent Allocated central office expenses Profits before Interest and Taxes 329 198 314 1,328 558 122 158 459 315 198 344 1,288 574 122 TC c TCC T 193 517 Identifiable Assets Cash (average) Accounts Receivable (average) Plant and equipment (net of depreciation 3,200) Total identifiable assets 94 377 2.763 108 357 2,764 3.234 3.229 lo Conditions for tourism Average summer temperature 29.7C 29.8 C Exhibit 5 2009 Ice cream Transfers between France and Spain Ice-cream Cost of ingredients Cost per litre Total (in '000 Euros) 603 Volume transferred (in '000 litres) Actual Costs (in Euros) Dairy Ingredients Other Ingredients Labor 2.76 1.56 1.98 0.69 0.09 1,194 416 0.09 57 Allocated Fixed Costs (in Euros) Other costs Depreciation S&A expenses 0.46 0.09 0.04 5% profit margin 0.17 Total transfer price 3.53 2,126