Compagnie du Froid, S.A.

Assignment Questions:

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?

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 Exhibit 6 Historical Data - Temperature and Sales Volume Year 27.7 France Temperature Sales Volume Volume Growth (degrees Celsius) (000 litres) 1995 1,344 1996 29.2 1,435 6.7% 1997 1,484 3.4% 1998 1,714 15.5% 1999 2,031 18.5% 2000 1,984 -2.3% 2001 2,208 11.3% 2002 2,489 12.7% 2003 2,761 10.9% 2004 2,998 8.6% 2005 29.7 3,216 7.3% 2006 30.3 3,445 7.1% 2007 29.6 3,797 10.2% 2008 29.4 4,087 7.6% 2009 (budget) 4,455 9.0% Average 29.8 C 9.1% ooooooo 29.8 28.3 Spain Year Temperature Sales Volume Volume Growth (degrees Celsius) ('000 litres) 1995 30.8 1,069 1996 31.2 1,272 18.9% 1997 29.0 1,402 10.2% 1998 31.6 1,685 20.2% 1999 1,852 9.9% 2000 2,006 8.3% 2001 1,964 -2.1% 2002 2,033 3.5% 2003 29.9 2,231 9.8% 2004 30.4 2,481 11.2% 2005 2,684 8.2% 2006 32.4 3,036 13.1% 2007 30.4 3,346 10.2% 2008 31.0 3,722 11.3% 2009 (budget) 4,094 10.0% Average 30.2 C 10.2% 31.8 Exhibit 6 Historical Data- Temperature and Sales Volume (Continued) Volume Growth Year Temperature (degrees Celsius) 1999 32.2 2000 30.4 2001 28.6 2002 31.8 2003 28.1 2004 28.2 2005 29.0 2006 28.3 2007 30.1 2008 30.0 2009 (budget) Average 29.7 C Italy Sales Volume ('000 litres) 892 1,036 1,143 1,434 1,508 1,639 1,771 1,872 2,090 2,433 2,725 16.1% 10.3% 25.6% 5.1% 8.7% 8.0% 5.7% 11.7% 16.4% 12.0% 12.0% Exhibit 7 Compagnie du Froid S.A. Mission Statement Compagnie du Froid, S.A. exists to offer customers the best in iced summer refreshments. We work as a team to produce and market only premium quality products that are known for innovation, quality, and value. In everything we do, we strive to delight our customers and offer an experience that reflects summer fun and relaxation. 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 Exhibit 6 Historical Data - Temperature and Sales Volume Year 27.7 France Temperature Sales Volume Volume Growth (degrees Celsius) (000 litres) 1995 1,344 1996 29.2 1,435 6.7% 1997 1,484 3.4% 1998 1,714 15.5% 1999 2,031 18.5% 2000 1,984 -2.3% 2001 2,208 11.3% 2002 2,489 12.7% 2003 2,761 10.9% 2004 2,998 8.6% 2005 29.7 3,216 7.3% 2006 30.3 3,445 7.1% 2007 29.6 3,797 10.2% 2008 29.4 4,087 7.6% 2009 (budget) 4,455 9.0% Average 29.8 C 9.1% ooooooo 29.8 28.3 Spain Year Temperature Sales Volume Volume Growth (degrees Celsius) ('000 litres) 1995 30.8 1,069 1996 31.2 1,272 18.9% 1997 29.0 1,402 10.2% 1998 31.6 1,685 20.2% 1999 1,852 9.9% 2000 2,006 8.3% 2001 1,964 -2.1% 2002 2,033 3.5% 2003 29.9 2,231 9.8% 2004 30.4 2,481 11.2% 2005 2,684 8.2% 2006 32.4 3,036 13.1% 2007 30.4 3,346 10.2% 2008 31.0 3,722 11.3% 2009 (budget) 4,094 10.0% Average 30.2 C 10.2% 31.8 Exhibit 6 Historical Data- Temperature and Sales Volume (Continued) Volume Growth Year Temperature (degrees Celsius) 1999 32.2 2000 30.4 2001 28.6 2002 31.8 2003 28.1 2004 28.2 2005 29.0 2006 28.3 2007 30.1 2008 30.0 2009 (budget) Average 29.7 C Italy Sales Volume ('000 litres) 892 1,036 1,143 1,434 1,508 1,639 1,771 1,872 2,090 2,433 2,725 16.1% 10.3% 25.6% 5.1% 8.7% 8.0% 5.7% 11.7% 16.4% 12.0% 12.0% Exhibit 7 Compagnie du Froid S.A. Mission Statement Compagnie du Froid, S.A. exists to offer customers the best in iced summer refreshments. We work as a team to produce and market only premium quality products that are known for innovation, quality, and value. In everything we do, we strive to delight our customers and offer an experience that reflects summer fun and relaxation