Colombo Handout Case Activity Based Accounting (ABC) Activity-based costing systems help managers make better decisions about pricing, product mix, and cost management related to product design and efficiency. In fact, General Mills used ABC to identify and analyze the costs associated with the different channels used to market its Colombo frozen yogurt products. Before performing ABC analysis, General Mills charged the same prices and provided the same promotions - $3 per case-to its customers, whether the customer was in the grocery (food purchased for later consumption or preparation at home) or the food-service outside of home, immediate consumption) channel. Upon closer examination of the food-service channel, General Mills discovered segments within food service destination yogurt shops or restaurants, and impulse locations located in business cafeterias and college campuses and military bases. Generat Mills also noticed that sales dollars for frozen yogurt products were relatively constant, but profits were declining. The company sensed that destination yogurt shops may be more profitable than impulse locations, but it didn't have the information about profit differences to make changes. General Mills logic was: Destination shops/restaurants focus on maximizing profit per square foot and managing the average sale per customer. However, impulse locations focus on cost per serving, and this segment of the business was growing at a much faster rate than the destination shop segment. The sales data and income statements for last year by segment were: 20 20 Split Category Impulse Loc Yogurt Shops Total Sales in cases 1.200.000 300.000 1.500.000 Sales revenue $23,880,000 $5,970,000 $29,850,000 Deduct: Promotions 3,600,000 900,000 4,500,000 Net sales $20,280.000 $5,070,000 $25,350,000 Deduct: COGS 13,800,000 3,450,000 17.250,000 Gross margin $6,480,000 $1,620,000 $8,100,000 Deduct: Merchandising 1,380,000 345,000 1,725,000 Deduct: SG&A 948,000 237,000 1,185,000 Net income $4, 152,000 $1,038,000 $5,190,000 NT per case tuis GOCO NI 1,200,000 cases d 11,038,000 NI 300000 Case bo Cost of goods sold includes $14,250,000 for ingredients, packaging, and storage, and $3,000,000 for picking, packing, and shipping. The product is the same across segments, so the cost to produce is the same. However, picking, packing, and shipping costs vary if the order for a full pallet. Full pallets cost $75 to pick and ship, whereas individual orders cost $2.25 per case. There are 75 cases in a pallet, with pallet and case usage by segment shown here: Impulse Segments Cases in full pallets Yogurt Shops Total 60,000 240.000 300,000 Individual cases 1.140,000 60.000 1.200,000 Total cases 1.200.000 300.000 1.500.000 Merchandising costs consist mainly of kits at $500 each. General Mills delivered a total of 3,450 kits last year, of which 90 went to yogurt shops. General Mills allocated SG&A costs to products based on gross sales dollars. When a random sample of the sales force kept diaries for 60 days, the resulting data revealed they spent much more time per sales dollar on yogurt sales than other General Mills products they represented. As a result, when SG&A costs were allocated based on time, the total allocation to yogurt jumped from $1,185,000 to $3,900,000. Of the total time spent on selling Colombo frozen yogurt, only 1% of that time was spent in yogurt shops. Questions: 1. How do the two segments General Mills identified for Colombo frozen yogurt sales differ from each other? 2. Using ABC analysis, restate the income statements above to show new net income (hint: add a line item for shipping). What is the net income per case? 3. Based on your analysis in question 2, what changes should General Mills make? 2 Colombo Handout Case Activity Based Accounting (ABC) Activity-based costing systems help managers make better decisions about pricing, product mix, and cost management related to product design and efficiency. In fact, General Mills used ABC to identify and analyze the costs associated with the different channels used to market its Colombo frozen yogurt products. Before performing ABC analysis, General Mills charged the same prices and provided the same promotions - $3 per case-to its customers, whether the customer was in the grocery (food purchased for later consumption or preparation at home) or the food-service outside of home, immediate consumption) channel. Upon closer examination of the food-service channel, General Mills discovered segments within food service destination yogurt shops or restaurants, and impulse locations located in business cafeterias and college campuses and military bases. Generat Mills also noticed that sales dollars for frozen yogurt products were relatively constant, but profits were declining. The company sensed that destination yogurt shops may be more profitable than impulse locations, but it didn't have the information about profit differences to make changes. General Mills logic was: Destination shops/restaurants focus on maximizing profit per square foot and managing the average sale per customer. However, impulse locations focus on cost per serving, and this segment of the business was growing at a much faster rate than the destination shop segment. The sales data and income statements for last year by segment were: 20 20 Split Category Impulse Loc Yogurt Shops Total Sales in cases 1.200.000 300.000 1.500.000 Sales revenue $23,880,000 $5,970,000 $29,850,000 Deduct: Promotions 3,600,000 900,000 4,500,000 Net sales $20,280.000 $5,070,000 $25,350,000 Deduct: COGS 13,800,000 3,450,000 17.250,000 Gross margin $6,480,000 $1,620,000 $8,100,000 Deduct: Merchandising 1,380,000 345,000 1,725,000 Deduct: SG&A 948,000 237,000 1,185,000 Net income $4, 152,000 $1,038,000 $5,190,000 NT per case tuis GOCO NI 1,200,000 cases d 11,038,000 NI 300000 Case bo Cost of goods sold includes $14,250,000 for ingredients, packaging, and storage, and $3,000,000 for picking, packing, and shipping. The product is the same across segments, so the cost to produce is the same. However, picking, packing, and shipping costs vary if the order for a full pallet. Full pallets cost $75 to pick and ship, whereas individual orders cost $2.25 per case. There are 75 cases in a pallet, with pallet and case usage by segment shown here: Impulse Segments Cases in full pallets Yogurt Shops Total 60,000 240.000 300,000 Individual cases 1.140,000 60.000 1.200,000 Total cases 1.200.000 300.000 1.500.000 Merchandising costs consist mainly of kits at $500 each. General Mills delivered a total of 3,450 kits last year, of which 90 went to yogurt shops. General Mills allocated SG&A costs to products based on gross sales dollars. When a random sample of the sales force kept diaries for 60 days, the resulting data revealed they spent much more time per sales dollar on yogurt sales than other General Mills products they represented. As a result, when SG&A costs were allocated based on time, the total allocation to yogurt jumped from $1,185,000 to $3,900,000. Of the total time spent on selling Colombo frozen yogurt, only 1% of that time was spent in yogurt shops. Questions: 1. How do the two segments General Mills identified for Colombo frozen yogurt sales differ from each other? 2. Using ABC analysis, restate the income statements above to show new net income (hint: add a line item for shipping). What is the net income per case? 3. Based on your analysis in question 2, what changes should General Mills make? 2