In 2009, the Superior Valve Division of the Able Corporation found itself in a position typical of fast-growing companies. Although sales revenues were increasing rapidly, capital equipment allocations from Able were less than desired, and profits were variable. Jerry Conrad, the general manager of the division, enrolled that year in a seminar on contribution margin income sponsored by the American Management Association (AMA). According to Conrad, "Before I went to that seminar, my knowledge of contribution margin income was limited to casual comments that I overheard at group general managers' meetings. A large acquisition in the automotive aftermarket industry had always used a contribution margin approach in its accounting systems. All other segments of the Able Corporation used the full costing method, but this company was allowed to keep its contribution margin cost system because a forced change of systems at the time of acquisition would have been too disruptive." Jerry believed that the full cost reports used in his division were accurate. He and Frances Kardell, the Division Controller, were confident they knew the total manufacturing cost of each of their products. However, Jerry did not have the same confidence in his staff's ability to determine how volume changes would affect profits. He was convinced that better utilization of plant and equipment and a more effective pricing structure would lead to substantially improved earnings. The division was not as profitable as others in the industry or other similar-size divisions in the corporation that had comparable manufacturing processes. A main point of the AMA seminar was that product lines do not produce profits; they produce contribution margin (sales revenue minus variable costs), which can become profits only after fixed costs are covered. The seminar also underscored not only the importance of cost behavior analysis but also the arbitrariness of many fixed cost allocations. Jerry immediately saw in contribution margin a new approach to solving Superior Valve's problems with both product mix and pricing decisions. Jerry discussed the subject of contribution margin with Todd Talbott, the Group Controller. After hearing the advantages and disadvantages of the approach, Jerry recommended that his division's product costing system be overhauled for the third time since Able Corporation acquired Superior Valve 20 years ago. Todd agreed to support a change in the management reporting system, but he pointed out that the contribution margin approach was contrary to the reporting philosophy of the corporation and, for external purposes, did not comply with GAAP, S.E.C. reporting requirements, and Internal Revenue Service directives on inventory valuation. When the decision to proceed was made, Frances and her accounting staff used regression analysis to classify manufacturing costs, other operating costs, and selling and general administration costs as either variable, fixed, or mixed. Mixed costs were separated into their variable and fixed components. Fixed costs then were identified as either discretionary (amounts to be expended based on decisions made annually or at shorter intervals) or committed (usually not subject to change in the short-run). A booklet on contribution margin which Jerry gave to his staff stated that fixed expenses are a function of time, and variable expenses (1) vary directly with changes in volume and (2) are usually expressed as a percentage of sales dollars or direct labor dollars. SPECIAL ORDER The Wadsworth Company, which was experimenting with various components of its product line, offered to purchase 6,000 Hydro-Con multi-function control valves from Superior for $160 each. Wadsworth would need 500 units per month with delivery commencing at the start of the new year. The special order would be in addition to the 80,000 units that Ralph Darwin, the division's Marketing Manager, expected to sell at the regular $200 price. Ralph considered the order to represent an excellent opportunity to increase long-term sales volume because it would be a new application for the product. He negotiated a flat $48,000 commission with the selling distributor. Jerry was concerned that cutting the price of the valve would set an undesirable precedent. He pondered the special deal for several days before going to see Ralph. "The price is below our full cost of $175 per unit," he said. "If we accept the Wadsworth proposal, the firm can always expect favored treatment." Jerry asked Daria Good, the Manufacturing Manager, and Frances to join this discussion in Darwin's office. When they arrived, he asked, "What is the division's capacity for making Hydro-Con Control?" Good's reply was "One hundred thousand (100,000) units per year, if we don't retool any machines dedicated to another product line." Frances presented the following standard cost data for Hydro-Con valves: Raw material $?35 Purchased components 30 Direct labor 12 Manufacturing overhead ??44 Total standard cost $121 After distributing copies of the budgeted income statement for the upcoming fiscal year (Table A), Frances revealed the variable overhead for the 80,000 unit Hydro-Con budget was $2,400,000. Of the budgeted fixed manufacturing costs, $400,000 was discretionary, with the remainder committed to basic capacity charges. Variable "other operating expenses" totaled $4 per unit; a 10% distributor commission ($20 per unit) comprised the variable portion of selling and general administration expenses. The Controller further indicated that manufacturing adjustments represented production variances and scrap, which she expected to vary with the number of valves produced. At the budgeted volume level, fixed other operating expenses would add an average of $16 to unit cost. Basic service costs such a production control, engineering administration, and accounting totaling $880,000 were allocated to Hydro-Con; the remaining fixed other operating expenses were directly related to the product line and were discretionary in nature. As the discussion continued, Ralph reviewed next year's budget. Of the total fixed selling, general, and administrative expense, $160,000 was earmarked for future advertising space in several trade publications and an upcoming trade show. The remainder of the budget related to salaries and other firm commitments. The Hydro-Con budget was designed to fully recover all costs at the 80,000 unit production level. The other product line budgets also were designed to fully recover costs at budgeted volume levels, and all fixed costs were expected to remain unchanged until the current maximum capacities were surpassed (Table B). Jerry asked his Division Controller what effect the Wadsworth offer would have on profits. But Daria had not yet studied the effects volume changes would have on division operations. PRODUCT LINE ELIMINATION Superior Valve's Marketing Department prepared a sales order plan by product line for each new year in both units and dollars. The Production Control Department then used the order plan to develop a sales shipment plan for each of the division's three plants. Ralph Darwin had very little marketing information to use in developing the Made to Order (MTO) Hydraulic Control product line plan. However, he knew that the line's compound growth pattern over the last three years had been quite disappointing, and he saw little prospect for substantial sales growth in the short-term future. Ralph recommended the division consider eliminating the Made to Order line. Daria had assured him that the MTO-dedicated machinery could be retooled to produce either of the standard lines. Darwin was convinced he could develop a market for the additional standard product in a relatively short time, and he strongly believed the division should concentrate on its two basic product lines. "After all," he commented, "that's where we're most successful." However, until the additional market for the standard product was developed, the elimination of MTO would mean the elimination of 30 manufacturing jobs. At the last staff meeting of the year, Jerry Conrad told Ralph he would study the product line elimination proposal after he made a decision on the Hydro-Con special order. He assigned the proposal top priority for the new year. REQUIRED: 1. Assume that inventories will not change during the year. Prepare budgeted contribution approach product line income statements for the year ending 6/30/2009. Categorize fixed costs as either discretionary or committed. 2. Should Jerry Conrad decide to accept the Wadsworth Company special order? If so, what will be the new Hydro-Con return on sales? 3. Should the Superior Valve Division eliminate the Made to Order product line if there were no alternative uses for its production capacity? 4. If all resulting standard products could be sold, how should the MTO capacity be allocated? (Assume only the capacity currently being used to produce 20,000 MTO units would be used to produce additional standard products.)

Chapter 11 - Decision Making with a Strategic Emphasis Chapter 11 Decision Making with a Strategic Emphasis Cases 11-1 11-2 11-3 11-4 11-5 11-6 Decision Making Under Uncertainty Profitability Analysis The Superior Valve Division OmniSports Inc. Garden Patch Foods Pop's Incorporated Readings 11-1: \"Relevance Added: Combining ABC with German Cost Accounting\" by Gunther Friedl, PROF. DR., Hans-Ulrich Kupper, PROF. DR., and Buckhard Pedell, PD DR, Strategic Finance (June 2005), pp. 56-61. This article describes ABC costing and German cost accounting (GPK) and provides a comparison of the two methods. GPK is presented as a superior method for relevant cost analysis. The authors encourage the use of both ABC and GPK. Discussion Questions: 1. 2. 3. 4. What is GPK? How does GPK compare to ABC costing? What are the key elements of GPK? What are the two types of cost centers used in GPK? Explain the difference. 11-1 Chapter 11 - Decision Making with a Strategic Emphasis Cases 11-1 Decision Making Under Uncertainty Exquisite Foods Incorporated (EFI) sells premium foods. Three independent strategies are being considered to promote a new product, Souffls for Microwaves, to dual-career families. Currently the contribution margin ratio on EFI's foods is 65%, which is expected to apply to the new product. EFI's policy for promoting new products permits only one type of advertising campaign until the product has been established. STRATEGY ONE The first strategy concentrates on television and magazine advertising. EFI would hire a marketing consultant to prepare a 30-second video commercial and a magazine advertisement. The commercial would air during the evening to address the working market, while the magazine advertisement would be place in magazines read by careerminded individuals. This advertising campaign would provide EFI $230,000 expected contribution from sales. STRATEGY TWO The second strategy promotes the product by offering 25% off coupons in the Sunday newspaper supplements, with a projected 15 percent redemption rate on sales revenue. EFI would hire a marketing consultant for $5,000 to design a one-quarter page, two-color coupon advertisement. The coupon would be distributed in the Sunday newspaper supplements at a cost of $195,000. Based on prior experience, EFI expects the following additional sales from this form of advertisement. Expected sales $500,000 600,000 700,000 800,000 900,000 Probability 10% 25 35 20 10 STRATEGY THREE The third strategy offers a $.50 mail-in rebate coupon attached to each box of Souffls for Microwaves. EFI would hire a marketing consultant for $5,000 to create a one-sixth page, one-color rebate coupon. Printing and attaching costs for the rebate coupon are $.07 per package, and EFI is planning to include the rebate offer on 500,000 packages. Although 500,000 packages may be sold, only a 10 percent redemption rate is expected. EFI expects the following additional sales from this type of promotion: Expected sales $400,000 450,000 500,000 550,000 600,000 Probability 10% 30 35 20 5 REQUIRED: 1. Exquisite Foods Incorporated (EFI) wishes to select the most profitable marketing alternative to promote 2. Souffls for Microwaves. Recommend which of the three strategies presented above should be adopted by EFI. Support your recommendation with appropriate calculations and analysis. What selection criteria, other than profitability, should be considered in arriving at a decision on the choice of promotion alternatives? 11-2 Chapter 11 - Decision Making with a Strategic Emphasis 11-2 Profitability Analysis Sportway, Inc. is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. About 60 percent of Sportway's products are purchased from other companies while the remainder are manufactured by Sportway. The company has a Plastics Department that is currently manufacturing molded fishing tackle boxes. Sportway is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available work stations. Presented below are the selling price and costs associated with Sportway's tackle boxes. Selling price per box ...................... Costs per box Molded plastic ............................... Hinges, latches, handle ................... Direct labor ($15.00/hr.) ................ Manufacturing overhead................ Selling and administrative cost........ Profit per box.................................. $86.00 $8.00 9.00 18.75 12.50 17.00 65.25 $20.75 Because Sportway believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68.00 per box delivered to Sportway's facility. Bart Johnson, Sportway's product manager, has suggested that the company could make better use of its Plastics Department by manufacturing skateboards. To support his position, Johnson has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Johnson believes that Sportway could expect to sell 17,500 skateboards annually at a price of $45.00 per skateboard. Johnson's estimate of the costs to manufacture the skateboards is presented below. Selling price per skateboard ............. Costs per box Molded plastic ................................. Wheels, hardware ............................. Direct labor ($15.00/hr.) ................... Manufacturing overhead.................. Selling and administrative cost.......... Profit per box.................................... $45.00 $5.50 7.00 7.50 5.00 9.00 34.00 $11.00 In the Plastics Department, Sportway uses direct labor hours as the application base for manufacturing overhead. Included in total manufacturing overhead for the current year is $50,000 of factory-wide, fixed manufacturing overhead that has been allocated to the Plastics Department, and would not change irrespective of the option chosen. For each unit of product that Sportway sells, regardless of whether the product has been purchased or is manufactured by Sportway, there is an allocated $6.00 fixed overhead cost per unit for distribution that is included in the selling and administrative cost for all products. Total selling and administrative costs for the purchased tackle boxes would be $10.00 per unit. 11-3 Chapter 11 - Decision Making with a Strategic Emphasis REQUIRED: 1. 2. Prepare an analysis based on the data presented that will show which product or products Sportway Inc. should manufacture and/or purchase to maximize profitability and show the associated financial impact. Support your answer with appropriate calculations. Identify the strategic factors Sportway should consider in its product decisions. (CMA adapted) 11-4 Chapter 11 - Decision Making with a Strategic Emphasis 11-3 The Superior Valve Division In 2009, the Superior Valve Division of the Able Corporation found itself in a position typical of fast-growing companies. Although sales revenues were increasing rapidly, capital equipment allocations from Able were less than desired, and profits were variable. Jerry Conrad, the general manager of the division, enrolled that year in a seminar on contribution margin income sponsored by the American Management Association (AMA). According to Conrad, "Before I went to that seminar, my knowledge of contribution margin income was limited to casual comments that I overheard at group general managers' meetings. A large acquisition in the automotive aftermarket industry had always used a contribution margin approach in its accounting systems. All other segments of the Able Corporation used the full costing method, but this company was allowed to keep its contribution margin cost system because a forced change of systems at the time of acquisition would have been too disruptive." Jerry believed that the full cost reports used in his division were accurate. He and Frances Kardell, the Division Controller, were confident they knew the total manufacturing cost of each of their products. However, Jerry did not have the same confidence in his staff's ability to determine how volume changes would affect profits. He was convinced that better utilization of plant and equipment and a more effective pricing structure would lead to substantially improved earnings. The division was not as profitable as others in the industry or other similar-size divisions in the corporation that had comparable manufacturing processes. A main point of the AMA seminar was that product lines do not produce profits; they produce contribution margin (sales revenue minus variable costs), which can become profits only after fixed costs are covered. The seminar also underscored not only the importance of cost behavior analysis but also the arbitrariness of many fixed cost allocations. Jerry immediately saw in contribution margin a new approach to solving Superior Valve's problems with both product mix and pricing decisions. Jerry discussed the subject of contribution margin with Todd Talbott, the Group Controller. After hearing the advantages and disadvantages of the approach, Jerry recommended that his division's product costing system be overhauled for the third time since Able Corporation acquired Superior Valve 20 years ago. Todd agreed to support a change in the management reporting system, but he pointed out that the contribution margin approach was contrary to the reporting philosophy of the corporation and, for external purposes, did not comply with GAAP, S.E.C. reporting requirements, and Internal Revenue Service directives on inventory valuation. When the decision to proceed was made, Frances and her accounting staff used regression analysis to classify manufacturing costs, other operating costs, and selling and general administration costs as either variable, fixed, or mixed. Mixed costs were separated into their variable and fixed components. Fixed costs then were identified as either discretionary (amounts to be expended based on decisions made annually or at shorter intervals) or committed (usually not subject to change in the short-run). A booklet on contribution margin which Jerry gave to his staff stated that fixed expenses are a function of time, and variable expenses (1) vary directly with changes in volume and (2) are usually expressed as a percentage of sales dollars or direct labor dollars. 11-5 Chapter 11 - Decision Making with a Strategic Emphasis SPECIAL ORDER The Wadsworth Company, which was experimenting with various components of its product line, offered to purchase 6,000 Hydro-Con multi-function control valves from Superior for $160 each. Wadsworth would need 500 units per month with delivery commencing at the start of the new year. The special order would be in addition to the 80,000 units that Ralph Darwin, the division's Marketing Manager, expected to sell at the regular $200 price. Ralph considered the order to represent an excellent opportunity to increase long-term sales volume because it would be a new application for the product. He negotiated a flat $48,000 commission with the selling distributor. Jerry was concerned that cutting the price of the valve would set an undesirable precedent. He pondered the special deal for several days before going to see Ralph. "The price is below our full cost of $175 per unit," he said. "If we accept the Wadsworth proposal, the firm can always expect favored treatment." Jerry asked Daria Good, the Manufacturing Manager, and Frances to join this discussion in Darwin's office. When they arrived, he asked, "What is the division's capacity for making Hydro-Con Control?" Good's reply was "One hundred thousand (100,000) units per year, if we don't retool any machines dedicated to another product line." Frances presented the following standard cost data for Hydro-Con valves: Raw material ....................................... Purchased components ........................ Direct labor ......................................... Manufacturing overhead ...................... Total standard cost ............................... $35 30 12 44 $121 After distributing copies of the budgeted income statement for the upcoming fiscal year (Table A), Frances revealed the variable overhead for the 80,000 unit Hydro-Con budget was $2,400,000. Of the budgeted fixed manufacturing costs, $400,000 was discretionary, with the remainder committed to basic capacity charges. Variable "other operating expenses" totaled $4 per unit; a 10% distributor commission ($20 per unit) comprised the variable portion of selling and general administration expenses. The Controller further indicated that manufacturing adjustments represented production variances and scrap, which she expected to vary with the number of valves produced. At the budgeted volume level, fixed other operating expenses would add an average of $16 to unit cost. Basic service costs such a production control, engineering administration, and accounting totaling $880,000 were allocated to Hydro-Con; the remaining fixed other operating expenses were directly related to the product line and were discretionary in nature. As the discussion continued, Ralph reviewed next year's budget. Of the total fixed selling, general, and administrative expense, $160,000 was earmarked for future advertising space in several trade publications and an upcoming trade show. The remainder of the budget related to salaries and other firm commitments. The Hydro-Con budget was designed to fully recover all costs at the 80,000 unit production level. The other product line budgets also were designed to fully recover costs at budgeted volume levels, and all fixed costs were expected to remain unchanged until the current maximum capacities were surpassed (Table B). Jerry asked his Division Controller what effect the Wadsworth offer would have on profits. But Daria had not yet studied the effects volume changes would have on division operations. 11-6 Chapter 11 - Decision Making with a Strategic Emphasis PRODUCT LINE ELIMINATION Superior Valve's Marketing Department prepared a sales order plan by product line for each new year in both units and dollars. The Production Control Department then used the order plan to develop a sales shipment plan for each of the division's three plants. Ralph Darwin had very little marketing information to use in developing the Made to Order (MTO) Hydraulic Control product line plan. However, he knew that the line's compound growth pattern over the last three years had been quite disappointing, and he saw little prospect for substantial sales growth in the shortterm future. Ralph recommended the division consider eliminating the Made to Order line. Daria had assured him that the MTO-dedicated machinery could be retooled to produce either of the standard lines. Darwin was convinced he could develop a market for the additional standard product in a relatively short time, and he strongly believed the division should concentrate on its two basic product lines. "After all," he commented, "that's where we're most successful." However, until the additional market for the standard product was developed, the elimination of MTO would mean the elimination of 30 manufacturing jobs. At the last staff meeting of the year, Jerry Conrad told Ralph he would study the product line elimination proposal after he made a decision on the Hydro-Con special order. He assigned the proposal top priority for the new year. REQUIRED: 1. Assume that inventories will not change during the year. Prepare budgeted contribution approach product line 2. 3. 4. 5. 6. 7. income statements for the year ending 6/30/2009. Categorize fixed costs as either discretionary or committed. Should Jerry Conrad decide to accept the Wadsworth Company special order? If so, what will be the new Hydro-Con return on sales? Should the Superior Valve Division eliminate the Made to Order product line if there were no alternative uses for its production capacity? If all resulting standard products could be sold, how should the MTO capacity be allocated? (Assume only the capacity currently being used to produce 20,000 MTO units would be used to produce additional standard products.) Identify the strategic factors that Superior Valve should consider. What changes, if any, should be made to the division's cost system? Why? What ethical issues, if any, should the division consider in connection with the decision to eliminate MTO? 11-7 Chapter 11 - Decision Making with a Strategic Emphasis TABLE A Superior Valve Division Budgeted Income Statement for the Year Ending 6/30/2009 ($000) Hydro-Con Revenue Material Direct Labor Overhead Total Cost of Sales @ Standard Gross Margin Adjustments Net Manufacturing Margin Other Oper. Exp. Expenses Selling & General Administration Operating Income Pneu-trol $16,000 5,200 960 3,520 9,680 6,320 800 5,520 1,600 1,920 $2,000 Made to Order $13,000 3,900 1,235 2,990 8,125 4,875 520 4,355 1,560 1,560 $1,235 $5,000 1,300 1,000 1,531 3,831 1,169 554 615 750 600 $(735 Total Division ) TABLE B Superior Valve Division Product Line Data Pneu-trol Unit selling price Variable overhead per unit Total discretionary fixed overhead Variable other operating cost per unit Variable selling and general admin. per unit Committed fixed other operating costs Committed fixed selling & general admin. Product Line Hydro-Con Pneu-trol MTO $50.00 $6.50 $225,000 $1.50 $5.00 $970,000 $160,000 MTO $250.00 $50.55 $100,000 $5.00 $25.00 $550,000 $75,000 Present Max. Capacity in Units Machine Hrs./Unit 100,000 350,000 50,000 6 2 5 11-8 $34,000 10,400 3,195 8,041 21,636 12,364 1,874 10,490 3,910 4,080 $2,500 Chapter 11 - Decision Making with a Strategic Emphasis 11-4 OmniSport Inc. OmniSport Inc. is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. OmniSport has an enviable reputation for quality of its products. In fact, the demand for its products is so great that at times OmniSport cannot satisfy the demand and must delay or refuse some orders, in order to maintain its production quality. Additionally, OmniSport purchases some of its products from outside suppliers in order to meet the demand. These suppliers are carefully chosen so that their products maintain the quality image that OmniSport has attained. About 60 percent of OmniSport's products are purchased from other companies while the remainder of the products are manufactured by OmniSport. The company has a Plastics Department that is currently manufacturing the boot for in-line skates. OmniSport is able to manufacture and sell 5,000 pairs of skates annually, making full use of its machine capacity at available workstations. Presented below are the selling price and costs associated with OmniSport's skates. Selling price per pair of skates Costs per pair Molded plastic Other direct materials Machine time ($16 per hour) Manufacturing overhead Selling and administrative cost Profit per pair $98 $8 12 24 18 15 77 $21 Because OmniSport believes it could sell 8,000 pairs of skates annually if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the skates for distribution. Colcott Inc., a steady supplier of quality products, would be able to provide 6.000 pairs of skates per year at a price of $75 per pair delivered to OmniSport's facility. Jack Petrone, OmniSport's product manager, has suggested that the company could make better use of its Plastics Department by manufacturing snowboard bindings. To support his position, Petrone has a market study that indicates an expanding market for snowboards and a need for additional suppliers. Petrone believes that OmniSport could expect to sell 12,000 snowboard bindings annually at a price of $60 per binding. Petrone's estimate of the costs to manufacture the bindings is presented below. Selling price per snowboard binding Costs per binding Molded plastic Other direct materials Machine time ($16 per hour) Manufacturing overhead Selling and administrative cost Profit per binding $60 $16 4 8 6 14 48 $12 Other information pertinent to OmniSport's operations is presented below. An allocated $6 fixed overhead cost per unit is included in the selling and administrative cost for all of the purchased and manufactured products. Total fixed and variable selling and administrative costs for the purchased skates would be $10 per pair. In the Plastics Department, OmniSport uses machine hours as the application base for manufacturing overhead. Included in the manufacturing overhead for the current year is $30,000 of fixed, factory-wide manufacturing overhead that has been allocated to the Plastics Department. 11-9 Chapter 11 - Decision Making with a Strategic Emphasis REQUIRED: In order to maximize OmniSport Inc.'s profitability, recommend which product or products should be manufactured and/ or purchased. Prepare an analysis based on the data presented that will show the associated financial impact. Support your answer with appropriate calculations and strategic considerations. 11-10 Chapter 11 - Decision Making with a Strategic Emphasis 11-5 Garden Patch Foods By Charles E. Davis and Elizabeth B. Davis Abstract Analyzing nonstrategic functions has become a major focus in today's business environment. This case presents the facts behind a decision faced by Garden Patch Foods, a prepared foods company that is looking for ways to increase efficiency and to improve the bottom line. As management considers how to increase efficiency of support operations, two major alternatives arise: (1) create a shared-services arrangement for the three divisions or (2) outsource the support functions. The case requires you to assume the role of a staff accountant and analyze the case facts and research issues relevant to shared-services arrangements and outsourcing. You will then communicate your recommendation in a written report to the CFO. Several references are included in the case to facilitate Internetbased research. Shirley Davis had the touch when it came to growing fruits and vegetables. In her small town of Farmville, North Carolina, Shirley would supply most of her neighbors with fresh produce throughout the year. Many of these neighbors encouraged Shirley to start a business selling her crops, but she didn.t feel she had the time to devote to both her family and starting a new business. After her children were grown, Shirley started experimenting with different methods of canning her produce. Her neighbors were always willing to be guinea pigs, and told her that her products had a better flavor than those available at the local grocery store. In 1940, Shirley was able to convince her local grocer to begin carrying her products under the label .Garden Patch Foods.. Within two years, the grocer was asking for more products than Shirley could supply, so she expanded her business by adding two cooks and one truck driver. She also needed to find additional suppliers of the raw fruits and vegetables. Shirley moved the operations from her home kitchen to a downtown warehouse. And so began the growth of Garden Patch Foods. As more and more stores began to carry the Garden Patch Foods label, Shirley had to expand the business to meet the increasing demand. Shirley hired an Operations Manager to oversee the production process, allowing her to spend more time investigating new canning techniques. In 1944, Shirley became aware of new methods of freezing foods that had been developed by Birdseye. She believed that this technology was the way of the future, and she was able to convince one of Birdseye's employees to join Garden Patch as director of research, primarily with the purpose of staying abreast of changes in freezing technology. This foresight catapulted Garden Patch Foods into a new era. In 1950, when the business had grown to sales of approximately $300,000 with 20 employees, Shirley decided to capitalize on the success of the company's frozen food product line. She bought out Mama Goode, a local bakery with a wonderful reputation for its baked goods, and began packaging frozen breads, cakes, and pies using their recipes and Garden Patch Foods. Freezing processes.Because the bakery was already in operation, she decided not to disrupt the food preparation process with changes other than management. She retained the building and staff and added the machinery necessary for freezing the products. In 1977, Garden Patch Foods purchased a snack-making company in Richmond, Virginia. The company saw this acquisition as a natural progression of its bakery operations. The snack maker continued to operate in the same fashion, retaining all operations and most administration, but began to produce under the name Mama Goode. Garden Patch hoped that this would help to spur the snack food sector by name recognition with its already successful baked-goods products. By 1999, Garden Patch Foods enjoyed a national reputation for quality frozen foods, baked goods, and snacks. Sales had grown to $50 million and the company employed 400 workers. Although many changes had occurred in 11-11 Chapter 11 - Decision Making with a Strategic Emphasis management as the control of the business passed down through the Davis family, success had been achieved by focusing on what the company did well. freezing high-quality foods. The Current Generation While Garden Patch Foods had been an innovator in terms of food preservation, it had not paid the same level of attention to business operations. As a result of the company's philosophy of retaining the entire operations of each of its two acquisitions, the company now consisted of three relatively autonomous divisions. Shirley's greatgranddaughter, Mary Smith, has just been promoted to president and is beginning an initiative to analyze Garden Patch Foods. business processes to seek the most cost effective way to operate. She recognizes the potential inefficiencies and redundancies in the current divisional organization of operations and is seeking to make a change. Mary has some ideas of her own as to the company's future, but she wants to hear what the rest of the company's leaders think. Mary met with the CFO, Ty Brown, and the Productions/Operations Supervisor, Bill Young, to discuss cost control opportunities. Mary began: .The reason for this meeting is to devise a new plan for increasing efficiencies in our divisions while saving costs. As you know, we must try to minimize our costs while maintaining our high quality. No matter what changes we make, I don't want to jeopardize the quality of our foods. Let's toss out some ideas.. Ty and Bill started thinking out loud, so it wasn't clear whose ideas were whose. Changes such as automation, just-intime inventory management, and streamlining production processes were offered as possible solutions. Mary interrupted, You both are probably correct that maintaining three separate and independent production facilities and inventory management systems may be costing us more than is necessary. Yet, we cannot do anything that will jeopardize the quality of our products. Each of our plants is optimized for production of a specific type of food, so I don't think we want to combine the production of frozen foods, baked goods, and snacks in a single location. Give me other thoughts. Bill thought for a moment and then replied, .Well, besides actual production, at each location we have purchasing, payables, receivables, and cash disbursements, as well as human resource management, an IS group, and an on-site management team. What if instead of combining the production facilities, we centralize one or more of the support functions? I think this is called a .shared-services. arrangement, and lots of companies are moving in this direction. Instead of running three individual purchasing, accounting, HR and IS departments, we would have one centralized department for each function. It seems to me that the centralized departments would be even more efficient because of the similarities of our processes at all of our locations,. contributed Bill. .We could use the most efficient people from each location to perform the tasks for all locations. I bet we could save on both labor and processing costs. Ty Brown got up from his end of the table and began to pace. .This seems like a lot of work for us. Do we have the expertise to create a shared-services group? I was reading an article recently that was touting the benefits of outsourcing, and this may be the way for us to go. The article pointed out that the procurement-through-payables cycle could represent a great cost to a company, and this process is rarely among a company's core competencies. The article said that as much as 80 percent of all transaction volume, 70 percent of time and effort, and 90 percent of the supplier base are incurred for individual purchases of $200 or less. I haven't run the numbers on this information for our company, but I would guess that we fall within that class. Outsourcing would give us the opportunity to use the experts. skills and expertise to obtain our goods, and we could benefit from greater economies of scale in our purchasing activities. I don't know that outsourcing is an option for us,. Mary countered. We must maintain the high quality of our materials in order to make our food products. Besides, the food industry is highly regulated to provide safety to our consumers. We must be able to determine exactly which ingredients from which supplier were used in producing each specific lot of product. We have a great deal of experience in purchasing our raw materials and have developed long-term relationships with our suppliers. I have to think that Garden Patch Foods can purchase these items for itself and its divisions far more effectively than any one else. 11-12 Chapter 11 - Decision Making with a Strategic Emphasis \"You are absolutely correct, agreed Ty. .The items you mentioned are our strategic purchases those integral components to the output of our business. But there are several other nonstrategic purchases we make for which we have no particular expertise.\" \"Are you saying you want to implement an outsourcing program in order to save a few bucks on office supplies?\" challenged Mary. \"No. I am saying that we could outsource the procurement-through-payables processes for all of our nonstrategic purchases. Just think about how many of these items we purchase each year. We buy office supplies, postage, and freight of course, but we also buy lots of other items. We go through tremendous amounts of uniforms, gloves, and hairnets. We purchase maintenance items like oil for the machines. We also hire a janitorial staff, temporary services, and building maintenance. Think about the amount we spend on insurance and travel arrangements; our people don't have time to research and purchase the lowest costs for all of these. Maybe we could consider outsourcing these purchases to people who do.\" Mary replied, .I don't know that this will help control costs significantly. I would like to implement something with significant impact on our bottom line. It doesn't seem like these processes are costing us that much. I'll consider the idea if it will truly save us money\" \"Think about our current system,\" continued Ty. .Each subsidiary maintains its own purchasing department, meaning we have three sets of people doing essentially the same thing. We have people completing the purchase orders, researching suppliers, processing invoices, and making cash disbursements. And then there is all the time that purchasing spends developing and maintaining relationships with our suppliers so that we get the level of service we desire. At each step of the process there is data entry activity to update our systems.\" \"You are right,\" responded Mary, \"the process does encompass quite a few steps. I am still not certain that outsourcing would save us money though. After all, we still would have to pay the outsourcers. Why don't you both work up some numbers for me showing the costs we are incurring with our present purchasing and payables functions. If we come up with a reasonable solution here, we'll think about our other support functions later. Ty, you investigate how and where we are spending money on nonstrategic purchases and our potential for outsourcing. Bill, you analyze the labor effort put into the purchasing and payable processes and see if you can get some estimates of the cost of implementing a shared-services group for this particular function. We'll meet again next week to discuss the findings. Thanks for your help.\" The Next Week Mary, Ty, and Bill met the following week to review the information each had gathered about current costs of the procurement and payables functions. Ty began the meeting with an analysis of the nonstrategic purchases currently made by each of Garden Patch Foods. divisions. \"I have investigated the purchasing practices of each of our divisions. Let's look at what we are buying. Exhibit 1 shows that the company spends over $8 million annually on nonstrategic items such as office supplies, postage, and telephone services. As the information was being collected, it became clear that there were certain categories of purchases that included similar products and services across all divisions. Those are the ones analyzed and listed separately in the exhibit. Some of those common purchases such as rent and insurance are already managed well, and I believe we are achieving the best prices given our current needs. The other 15 categories of purchases analyzed reveal some interesting information.\" \"Our three divisions purchase nonstrategic items in varying degrees from a wide variety of suppliers. For example, across the company we have 37 different suppliers for office supplies. Spreading the volume of our purchases over so many suppliers means that we limit our ability to leverage volume purchasing when negotiating prices with a particular supplier. My research indicates that having no more than five suppliers in any purchase category is considered a 'best practice'. If we could move to that level of supplier concentration, we would be able to negotiate better prices because of the increased volume of business going to each supplier. 11-13 Chapter 11 - Decision Making with a Strategic Emphasis \"As a result of using numerous suppliers within a single category, the company pays different prices on the same item, depending on which location makes the purchase. For instance, the bakery currently receives a 12 percent discount off uniform book rates, while the snack division gets 20 percent off the book rate. Centralizing the purchasing function into a shared-services arrangement would allow us to place orders for all subsidiaries through a common process, resulting in all locations paying the same price for the same item.\" Bill then spoke up. \"I've done some asking around and found out how our people in Purchasing and Accounts Payable spend their time. This information is summarized in Exhibit 2. It's amazing that the equivalent of almost 20 full-time employees, at an annual cost of approximately $633,000, spend time on nonstrategic purchasing activities. What's even more surprising is that the division controllers reported we process about 22,000 invoices annually for purchases. That translates into more than $28 per invoice just for labor, not to mention materials and support costs! \"Based on my interviews with the purchasing departments, about 70 percent of the time spent on nonstrategic purchasing activities involves investigating the best supplier in terms of cost and quality, placing purchase orders, and managing relationships with our suppliers. Even without managing our supplier base, it seems logical to expect that we would save some time and money if we would just create a shared-services environment for our three divisions. You know, if we intend to continue to expand through acquisition, this problem is just going to grow unless we have a system in place to bring the new company in and integrate it into an existing purchasing system. Remember, we.ve got that deal pending with Metropolitan Foods in Minneapolis.\" \"I also did some calling around to companies that have implemented similar shared-services concepts in procurement and payables. These companies found that creating a shared-services purchasing function eliminated much of the variability experienced in prices and suppliers and resulted in a 5.15 percent annual cost savings on nonstrategic items. Developing and managing the shared-services supplier base would require somewhere in the neighborhood of $45,000 in consultant fees. The result of this effort would be a centralized supplier database and a reduced number of suppliers. Reducing the number of suppliers will allow us to concentrate our purchases with a few suppliers, giving us greater leverage when negotiating contract prices. It may take us three to four months to achieve our maximum savings once we implement the program, but it will be worth the wait.\" 11-14 Chapter 11 - Decision Making with a Strategic Emphasis 11-15 Chapter 11 - Decision Making with a Strategic Emphasis 11-16 Chapter 11 - Decision Making with a Strategic Emphasis \"In addition to creating a centralized supplier database, this would also be a good time to reevaluate our current systems. Each division currently has a different software package for purchasing and accounts payable. If we go to a shared-services arrangement, we will still need to provide a way for plant personnel to make purchase requisitions to the shared-purchasing department. The people I talked with said to expect spending around $300,000 to purchase and implement a good purchasing system. They also suggested implementing a compatible accounts payable system to facilitate a centralized settlement process. This type of system should run around $195,000 for a world-class solution. That's a total cost of $540,000 to implement the shared-services system. And that's not including the ongoing operational costs. My contacts indicated that for a company of our size, the new system would require, in FTEs (full-time equivalents),1 2.3 Service Managers/Buyers, 1 purchasing office manager, 3.3.5 purchasing/accounting clerks, and .5 systems administrator to handle all the nonstrategic purchasing and payables processes, whether or not the purchases are from the centralized vendor list. That would reduce headcount considerably. Once system implementation begins, it would take us about six months to reduce headcount and reassign responsibilities.\" \"This is some very interesting information,. replied Mary. .I had no idea we had so many people dealing with so many suppliers. Perhaps there is some merit to centralizing our purchasing function to see if we can reduce the number of suppliers we have to deal with. But that's a lot of money to spend if a cheaper solution could be found. What about outsourcing, Ty? How would it differ from creating a shared-services concept?\" \"Well, Mary,\" began Ty, \"I talked with PayOut, Inc., a procurement and payables outsourcing firm, to get an idea about the services they would provide. PayOut would roll us into their existing national supplier network. Because of the tremendous volume of business that PayOut commands, these suppliers have signed contracts with PayOut to provide goods and services at prices below their stated catalog prices. PayOut would install their existing worldclass procurement and payables systems in our office. While all the processing would be done by PayOut, we would have the ability to generate purchase requisitions at each location as needed.\" \"We'll still need those 6.5.8 FTEs Bill mentioned earlier to manage the process and get the information to PayOut, won't we?\" asked Mary. \"Actually, we won't. We'll still have our people for the strategic purchases, but for nonstrategic purchases, our operations managers, secretaries, or whoever is making purchase requests now will continue to do so,\" said Ty. \"But instead of sending the request to Purchasing, the request is made online to PayOut. Requisitions would be consolidated by PayOut and then transmitted to the supplier. All settlement activities getting the invoice and paying the bill would be handled by PayOut in one of two ways. They can either generate checks against our bank account to pay suppliers, or they can pay from their own account on our behalf. Under the second option, we would wire them money to cover the payments made for us. PayOut's system would interface with our general ledger to create the necessary journal entries. Any detail reporting we would need on procurement and payables activity would come from the PayOut system. PayOut would also handle all of our 1099 reporting at year-end.2 \"If we choose to go with PayOut, there would be a $40,000 fee to transition to their system. Additionally, PayOut.s ongoing services would cost us $15,000 per month. This price is good up toan annualized volume of 30,000 invoices. PayOut could probably start saving us money on purchases in about two months, and labor reduction would take about three months.\" Mary concluded the meeting with the following directive. \"It seems we have all the information we need. Ty, get your people to prepare a report that analyzes the financial implications of our options. I also would like the report to include the pros and cons of each option, aside from the numbers. Let's make a decision soon.\" Required Assume that you are a staff accountant at Garden Patch Foods and CFO Ty Brown has asked you to help him prepare the requested report for the president. Specifically, he wants you to run the numbers that have been gathered by him and Bill to estimate the financial impact of the options available to the company (remember that status quo is always an option). Additionally, he wants you to identify any nonfinancial issues that need to be considered, especially in light of the fact that the company intends to continue growing through acquisition. Information systems 11-17 Chapter 11 - Decision Making with a Strategic Emphasis and internal control issues should be considered as part of these nonfinancial issues to the extent you believe they are relevant. Since outsourcing and shared service arrangements are new to everyone at Garden Patch Foods, you are going to have to do some research to identify general issues relevant to these options and then apply those issues to the situation faced by Garden Patch Foods. Some resources that might be helpful are: Dash, J. 2001. Business process outsourcing. Computerworld. (January 1). Available at http://www.computerworld.com/managementtopics/xsp/story/0,10801,55557,00.html . Davis, C. E., E. B. Davis, and L. A. Moore. 1998. Outsourcing the procurement-through-payables process. Management Accounting (July): 38.44.Alsoavailable at: http://www.sourcenetsolutions.com/outsourcingwhitepapersews/7dav.pdf. Gareiss, R., and R. Weston. 2002. Analyzing the outsourcers. InformationWeek (November 18):30.42. Goolsby, K., and F. K. Whitlow. How to make your Accounts Payable function really PAY. Available at http://www.sourcenetusa.com/publications/download/apfunction_white_paper.pdf. Krell, E. 2002. Sourcing goes strategic. Business Finance (September): 33.37. Available at: http://businessfinancemag.com/archives/appfiles/Article.cfm?IssueID=366&ArticleID=13901 . McReynolds, A., and B. O.Brien. 2002. Earnings pressures boost shared services. Financial Executive (January/February): 36.39. Websites o SourceNet . http://www.sourcenetusa.com/ o Shared Services and Business Process Outsourcing Association - http://www.sharedxpertise.org/ o The Outsourcing Institute - http://www.outsourcing.com You may also want to search your library's electronic resources using the keywords \"outsource\" and \"shared services.\" The report you provide to Ty should adhere to the following format: Part I: Executive Summary (one page) Briefly describe your method for gathering information and how it will be presented in the rest of the report. List the options available, their estimated financial result and the key nonfinancial issues. Make a recommendation to Ty as to what the company should do next. Part II: Shared-services Arrangements Describe the nature of shared-services arrangements, what types of companies use them, and for what purposes. Identify and discuss the pros and cons of shared-services arrangements, including the nonfinancial issues that result because of this type of arrangement. Identify and discuss how the issues described above specifically apply to Garden Patch Foods and how this alternative will assist the company in its strategy of growth by acquisition. Part III: Outsourcing Describe the nature of outsourcing, what types of companies use it, and for what purposes. Identify and discuss the pros and cons of outsourcing, including the nonfinancial issues that result because of this type of arrangement. Identify and discuss how the issues described above specifically apply to Garden Patch Foods and how this alternative will assist the company in its strategy of growth by acquisition. Part IV: Calculation and Support for Financial Evaluation of Each Option 11-18 Chapter 11 - Decision Making with a Strategic Emphasis Calculate the financial savings based on the numbers generated by Bill and Ty. Use sensitivity analysis to consider the 5 percent, 10 percent, and 15 percent range of outcomes depending on the amount of possible savings on purchases realized by each option. Part V: References Used for Parts II and III 11-19 Chapter 11 - Decision Making with a Strategic Emphasis 11-6 Pop's Incorporated By Brian Miller, Jon Austin, Kenneth Schappell Background Paulo \"Pops\" Gigliotti emigrated from Italy and settled in Dayton, Ohio. In Italy, Mr. Gigliotti had earned both a bachelors and masters degree in food chemistry and worked for several food processing companies. Pops came to the United States when his cousin, Guiseppe Manganaro, offered him the position of senior food chemist at Manganaro Foods, a growing producer of Italian cuisine for the American market. Although he enjoyed working with family members, he did not feel challenged by his new job and therefore began tinkering with various \"experiments\" at home. Mr. Gigliotti was fascinated by the variety of carbonated beverages available in America. He enjoyed the refreshing sensation caused by carbonation, but felt all of the American soda pops were too sweet and none of them provided the depth of flavor to which he had been accustomed with non-carbonated beverages in Italy. After much experimentation, Mr. Gigliotti developed a formula for a semi-sweet, multiple-fruit-flavored carbonated beverage. After sampling his creation, friends and family alike responded in an overwhelmingly positive manner. Many of them encouraged him to bottle the beverage and sell it locally. Indeed, Mr. Manganaro was so excited about the beverage that he offered to provide the necessary production equipment, facilities, and capital. After much discussion, Mr. Gigliotti and Mr. Manganaro decided to call the beverage Pop's Punch and began marketing it in the Dayton area. Consumer response was very strong. Within five years Pop's Punch was selling well throughout the Midwest region. To keep up with demand, and to develop a more focused marketing strategy, the cousins detached the beverage operations from Manganaro Foods and established Pop's, Incorporated. To compete more directly in the non-cola carbonated soft drink market; Mr. Gigliotti developed several individual fruit-flavored sodas, which were marketed under the Pop's (Orange / Grape / Strawberry / Cherry) Soda brand name. This strategy proved to be highly successful and after five years, Pop's, Inc. began selling its beverages on a nationwide basis. Over the next 20 years, Pop's, Inc. failed to introduce any new products, but experienced steady growth in both sales and profits from the base line-up. During this time period, the company achieved a respectable 4.7% share of the non-cola market and subsequently made its first public offering. After nearly 35 years in business Mr. Gigliotti and Mr. Manganaro both retired and sold all of their holdings. For the next eight years Mr. Gigliotti's son, Paulo, Jr., served as chief executive officer, but was recently forced to resign after failing to achieve unit and dollar sales growth. Michael Newberg, formerly the firm's chief financial officer, has been appointed CEO and charged with growing the company. Current Situation Upon assuming his new responsibilities, Mr. Newberg and his management team performed a thorough S.W.O.T. analysis. The corporate history and culture had long emphasized slow gradual change. They concluded the company possessed neither the core competencies nor the capacity to change that would be necessary to diversify into an entirely new industry. Accordingly, Pop's, Inc. would need to devise a new strategy by which to achieve growth within the soft drink industry. The team carefully considered several alternative ways of revamping its strategy within the noncola market, but none of them seemed to have the potential for the magnitude of growth the team desired. The team then began to consider the \"unthinkable\" - the possibility of entering the cola market. Although the risks were high, so were the possible rewards with each market share percentage point in the domestic soda market worth approximately $500 Million in annual retail sales. Under Mr. Newberg's leadership, Pop's, Inc. began the process of developing a strategy with which to compete directly with the giants of the Cola industry. 11-20 Chapter 11 - Decision Making with a Strategic Emphasis The research and development team created a formula for Pop's Cola that performed very well against Pepsi and Coke in national blind taste tests. Ecstatic about these results, Mr. Newberg recently met with a group of venture capitalists in an effort to gain financing necessary to launch the new brand. The venture capitalists were intrigued by the idea, were impressed with the preliminary marketing research results, and believed Pop's, Inc. possessed several requisite strengths. However, they highlighted the fact that entering the \"cola war\" was a very different battle-field than the non-cola market in terms of the (a) strength of the competition, (b) ferocity of the battles fought, and (c) resources required for successful marketing. In particular, the venture capitalist had several concerns regarding formula costs, economies of scale, and price points. In order to provide the necessary information in these areas, Mr. Newberg has assigned you to the project described below. Cost Estimation Project Mr. Newberg has requested that you analyze the cost of making Pop's Cola and then compare that cost to the current price points offered by Coke and Pepsi on both the 12 Pack of 355ml Cans and the 2 Liter Bottle. Your predecessor recently left the company, but has already pulled together the raw cost data you will need to complete the project. Sales Projections Over the past 12 months the corporation has been evaluating the product under the brand name Pop's Cola in a Denver test market. Lacking any specific pricing expertise the company matched the on-shelf pricing of Coke and Pepsi, and determined the following sales estimates. Based on a conversation with the engineering staff the 355-ml cans need to be filled at 357 ml to avoid under-pack, while 2 Liter bottles need to be filled at 2.008 Liters per bottle. In addition to overfill, the manufacturing engineers expect to incur a 3% loss of raw materials during the making phase of production. 11-21 Chapter 11 - Decision Making with a Strategic Emphasis Manufacturing Engineers estimate that approximately 2% of all packing materials will be damaged/lost through production and warehousing. In addition to these costs, Pop's will additionally need to purchase several new molds for 2-Liter Bottles and Lids at a total cost of $2,000,000. (Amortized Straight line over 3 Years.) The Company considers these expenses a part of Packing Materials and charges all bottle mold amortization to only the 2-Liter Bottles. Manufacturing Expense Pop's fruit-flavored soda volume has maximized the capacity in the current production facilities. Pop's, Inc. has decided to avoid the hassle associated with building a new plant and utilize a contract manufacturer to produce Pop's Cola. After investigating several contract manufacturers, the purchasing department selected Shull Enterprises based on their ability to meet rigorous quality measures at a competitive price. Shull Enterprises will require a $1.5 Million Supplier Advance for new equipment - (Pop's, Inc. expects the equipment to last three years and recommends using straight-line amortization for all Supplier Advances.) In addition to these costs Shull will charge the following fees. Note that both products will be charged a fee for the making and packing process. Distribution Pop's, Inc. has decided not to invest in the extensive sales/distribution system of its competitors. Instead Pop's, Inc. will deliver its products in full truckloads directly to its customer's distribution warehouses. Distribution costs should be allocated based on space utilization. The warehouse supervisor has pulled together the following assumptions: 80 of the 12 Pack Containers fit on a single Pallet 250 of the 2 Liter Bottles fit on a single Pallet 48 Pallets of either size fit on a normal truck The Distribution Coordinator estimates that the average cost for a trucking company to deliver a full truckload is $1,000/Truckload. Additionally, a one-time cost of $10 / Pallet will be charged for Storage and Handling at the warehouse. Other Fixed Costs Several departments will require additional resources on a long-term basis to appropriately staff the additional requirements of the new brand. Incremental Wages and benefits for incremental Purchasing/Planning Personnel amount to $300,000/Year. Additional non-manufacturing costs are expected to increase as follows: 11-22 Chapter 11 - Decision Making with a Strategic Emphasis Allocation Basis Unless otherwise indicated Pop's, Incorporated allocates all fixed costs based on sales projections (in Liters) Requirements 1. Calculate the Full Product Unit Cost of both the 12 pack and 2-Liter products. Make certain to round to four decimal places and include a detailed analysis by component (Raw Materials, Packing Materials, etc.) 2. At what price would Pop's, Inc. need to sell the 12 pack and 2-Liter products to \"the trade\" in order to provide a 25% profit mark-up for Pop's, Inc. shareholders (Pre-Tax & Interest Expense)? 3. At what Price would the trade sell the 2 Liter and 12-pack on-shelf to the final consumer assuming that on average \"the trade\" requires a 30% mark-up? 4. (Optional) Visit at least three different channels (i.e. Grocery, Mass/Club Stores, Convenient Stores) that distribute Coke and Pepsi products. For each channel researched list the Store Name, Location, Date, and the promotional pricing currently offered for both the 2-Liter and 12 pack products. 5. Based on a comparison between your cost analysis and competitive benchmarking would you recommend that Pop's, Inc. enter the \"Cola Market\" and compete directly with Coke and Pepsi? Provide a strong justification for your conclusion and discuss what factors influence the difference in on-shelf pricing between Coke & Pepsi and Pop's Cola. 6. Prepare an alternative strategy for gaining market share in the beverage industry. Determine whether Pop's, Inc. should compete using a \"Low Cost\" or a \"Differentiation\" strategy, and provide specific examples of how you would implement your strategy. 11-23 Chapter 11 - Decision Making with a Strategic Emphasis Readings 11-1: RELEVANCE ADDED: COMBINING ABC WITH GERMAN COST ACCOUNTING Activity-based costing is better for long-term decision maki