HBSP Product Number TCG 201 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Neighborhood Servings A few years ago, I didn't think we'd make it. Some other agencies and several small restaurants were com peting with us, and were undercutting our prices. So a year ago we decided to begin making specialty meals for AIDS and cancer patients, and for other people with special dietary needs. I thought that strategy was working. Certainly sales were up. But now a consultant tells me that our cost accounting system is giving us misleading results, and we may actually be losing money on our specialty meals. On top of that, some of our regular customers are complaining about our prices. The speaker was George Larson, CEO of Neighborhood Servings, a nonprofit organization that produced and delivered meals to homes throughout the greater Kansas City area. He continued: I realize that we now need to dig into our costs. We established our prices based on these costs. If the costs for specialty meals are higher than we thought, then our prices are too low, and our whole new strat- egy is in jeopardy. In addition, if our costs for regular meals are too high, then we're setting our prices too high and we'll lose out to the competition even more. Also, we use our cost data for budgeting each year. so if the data are bad, then our budget will be unrealistic. BACKGROUND Neighborhood Servings (NS) had been in business for over 10 years. It began as a "meals on wheels" agency, providing dinners to elderly people and individuals who were permanently or tem- porarily homebound. Almost all of its clients were single and lived alone. Over the years, its menu had expanded, although, based on market research into customer preferences, NS continued to pro- vide its clients with only one meal a day. All meals were sold in "collections" of seven-a different meal for each day of the week, and deliveries (of seven meals each) were made once per week to each client (clients often froze a few of the meals for use in the latter half of the week). During the past few years, NS had encountered some competition for its services. One or two other nonprofits that had been successful in other parts of either Kansas or Missouri had expanded their operations into the Kansas City area. In addition, some of the local fast-food restaurants, real- izing that they could use their kitchen staffs to provide basic fare for delivery to nearby homes, had begun providing meals in certain neighborhoods that were close to their restaurants. In response, and after considerable debate. NS decided to offer specialty meals. There were two main differences between NS's specialty meals and its regular meals: (1) specialty meals used a va- riety of nonstandard ingredients, frequently including organically grown fruits and vegetables, and often being meatless, and (2) because of a greater need for freshness, specialty meals were delivered daily (one per customer). The new strategy seemed to be working. During the past year, approximately 80,000 of NS's 200,000 meals were specialty meals. The remainder were regular meals. THE COST ACCOUNTING SYSTEM NS's cost accounting system calculated the cost of a meal by summing its direct and indirect costs. Direct costs included ingredients, packaging materials, and kitchen labor. When a new meal was introduced, NS's accounting staff spent considerable time determining exactly what ingredi- ents it contained, and measuring the time it took the prep and line staffs to actually prepare the in- gredients and cook the meal. Prep staff were those kitchen workers who washed and cut the ingre- dients, prepared sauces, and took care of other tasks needed prior to actually cooking the meals. Line staff cooked and assembled the ingredients for each meal. This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illus trate either effective or ineffective handling of an administrative situation. Copyright 2012 by The Crimson Group, Inc. To order copies or request permission to reproduce this document. contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and interna- tional copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.thecrimsongroup.org) This document is authorized for use only by hadya irtan in Hadiya irtan Spring 2022 taught by DIVYA ANANTHARAMAN, Rutgers University Newark from Mar 2022 to Sep 2022