Parson Foods Vegetable Company (PFVC) is a newly created, wholly owned subsidiary of Parson Foods, one of the oldest and largest fluid milk processors in the United States. Parson was founded in 1925 and grew through a series of acquisitions, first in milk processing and later in frozen and canned vegetables.

Parsons operating strategy was to provide capital and management expertise to acquired entities while giving local management significant decision-making autonomy. This strategy worked well with fluid milk processors who tended to compete in local or regional areas. As Parson moved into frozen and canned vegetables, it increasingly found that these firms were competing nationally. Multiple vegetable companies under the Parson Food umbrella were competing for the same business, often undercutting one another on price to win business. These activities threatened financial performance, resulting in lower profits and even losses in many of these vegetable companies.

Parsons management decided that a strategic change was needed to return its vegetable companies to profitability. This resulted in the creation of PFVC where all the vegetable companies were consolidated. Richard Lawson was named CEO of the new company. His charge was to improve the lagging performance in the vegetable group. Changes were expected and fast. Richard and his new executive team were feeling the pressure to find a way to turn this thing around.

The Opportunity

Richard knew he and his team faced many challenges. In recent months, they had been working on operational and structural changes designed to reduce administrative and selling costs. He also realized that continuing the turnaround requires the firm to improve sales of continuing and new products.

Several months ago, Carlos Rico, the companys marketing manager, approached Richard with an idea for a revolutionary nutritious convenience frozen food product. The new product, Chicken Sensationsconsisting of frozen vegetables, spaetzels (a coated seasoned pasta), and chickenwould compete against frozen pizza and microwaveable dinners. Based on initial projections, Chicken Sensations had the potential to be a homerun with company sales, expected to increase by 20% and with gross margins double current vegetable offerings.

While the potential for Chicken Sensations was palpable, Richard was a realist given PFVCs history of new product introduction. The most recent, Soup-in-a-Flasha microwaveable soup starter kitfailed miserably with the company writing off $10 million in unsold finished goods. As a result, corporate executives were not enthusiastic about investing in another PFVC new product launch. Richard mused, If Chicken Sensations fails, my tenure as CEO may be short-lived.

The Team

Richard decided to assemble a cross-functional team of PFVCs best sales, production, and financial professionals to evaluate the feasibility of Chicken Sensations. Along with Carlos, team members included Gary Smits, the production manager, and Vicki Hoerning, the chief financial analyst. At the teams first meeting Richard began: Congratulations and welcome. You have been selected to evaluate the feasibility of a new product, Chicken Sensations. This product has the potential to create a new category of convenience frozen foods and to dramatically increase company profits. Our challenge is to objectively evaluate the potential of this product idea. Introducing a product and having it fail is not an option. Carlos had the idea for this product, so I will let him explain.

Carlos stood up and moved to the front of the conference room. Thanks, Richard. Good afternoon. As many of you are aware, we currently produce Pasta Done, a microwaveable product consisting of frozen vegetables and spaetzels. This new product idea takes that concept one step further. We are going to add protein, in this case chicken, into the microwaveable bag with the vegetables and spaetzels. Competing products separate chicken, frozen vegetables, and a sauce in multiple pouches. Combining all of the ingredients enhances convenience and simplifies the cooking process for consumers. They simply empty the contents into a bowl, add a tablespoon of water, microwave for six minutes, and voila! Dinner is ready.

That delicious aroma you smell coming from the test kitchen is a sample of Chicken Sensations. Lets eat!

While the team was sampling the product, Richard continued, Thanks, Carlos. I think this could be a winner, but we need to make certain it is financially feasible. If we launch Chicken Sensations, we need to produce a price-competitive, high-quality product that delivers a profit superior to our current offerings. We know that a significant challenge to launching Chicken Sensations is getting USDA approval to handle meat in our processing facility. We have limited institutional knowledge of the process, because it was 30 years ago when we last applied for USDA approval. We also need to consider how our competitors will react to the new product and document market issues related to product costs and distribution. At our next meeting, I want to review your initial findings on the financial feasibility of Chicken Sensations.

Carlos, I would like for you to evaluate the selling prices of current convenience frozen food products; propose a selling price; recommend the mix of chicken, spaetzels, and vegetables; forecast first-year sales; and quantify incremental sales and marketing costs.

Gary, I would like you to estimate the costs associated with retrofitting (preparing) your facility for USDA approval and estimate product costs.

Vicki, would you work with Carlos and Gary to generate a financial feasibility analysis? You will probably need to perform analyses to evaluate the expected overall first-year profitability, breakeven sales level, and margin of safety. What-if analyses can assess the impact of sales forecast errors and changes in the sales price, product costs, and quantity inputs. With our recent history of new product introduction, our goal is to far exceed breakeven in the first year. Anything less would not be acceptable to Parsons corporate executives.

Vicki commented, Richard you can count on me. I think I speak for the entire team when I say we are excited to be part of the team and will do everything possible to ensure the success of Chicken Sensations.

Addressing the entire team, Richard reiterated, I do not think I need to remind you of the importance of this project. Because of the failure of Soup-in-a-Flash and limited financial resources, corporate executives will be reluctant to authorize the launch of any new products. We need to ensure our analysis is rock-solid before requesting any funds.

Two Weeks Later

Good afternoon gentlemen, Vicki began addressing Carlos and Gary. I know you have been busy with your Chicken Sensations assignments. My goal today is to discuss the information you have gathered so that we can put together the initial feasibility analysis that Richard wants. I will record and summarize the information you provide. Carlos, what did you determine about pricing and other expected costs associated to launch Chicken Sensations?

First, I looked at comparable frozen convenience food products with package sizes ranging from 20 to 30 ounces, the retail price per ounce is from $0.16 to $0.20or $3.20 to $6.00 per package. Since I expect consumers to assign a higher nutritional value on Chicken Sensations than other products, I suggest we target a retail sales price of $0.1875 per ounce or $3.75 per bag for a 20-ounce bag. With retailers requiring a minimum 20% gross margin for new products, I recommend that our selling price to them be $3 per bag or $36 per case of 12.

Carlos further explained some of the sales expenses and other expected costs, To encourage consumer trial of Chicken Sensations, we will have to offer coupons of $0.20 per bag or $2.40 per case for all cases sold in the first year. To gain access to convenience frozen food distribution channels, we will have to pay a brokerage commission of 6% of our sales price. In addition, retailers (in total) require a one-time slotting allowance of $6 million to purchase shelf space. Vicki noted that the slotting allowance costs would need to be expensed in the first year.

Continuing, Carlos explained estimates for other costs: Package design costs for artwork and photography expected to be $X million will have to be paid in the first year. To support Chicken Sensations, we will need to hire additional salespeople at total annual cost of $400,000. I anticipate we will sell XX cases in the first month with sales increases of 15,000 cases per month for the first year when we will reach a maximum of X cases per month.

Great. Before we discuss the production and cost assumptions, Gary do you have any questions for Carlos? Vicki asked.

Thanks for asking. I do have a few questions. Based on your comments, it looks like our case configuration would be 12, 20-ounce bags or a 15-pound case. Is that correct, Carlos? Gary questioned.

Yes, I feel a 20-ounce bag allows for us to be competitive on a price per ounce with other convenience frozen food products, Carlos clarified.

That package size works great. We anticipate producing Chicken Sensations at the Oakdale facility where we already make spaetzels and have the capability and capacity to package 20-ounce bags. Are you comfortable with your sales forecast? As I recall, the sales forecast for Soup-in-a-Flash was overly optimistic, causing us to over-produce a product that never sold. Gary said.

Yes, I am confident, Gary, Carlos replied tersely, I am not certain if you are aware that prior to joining PFVC, I successfully introduced several new frozen pizza products at another company. The forecast I provided is consistent with first-year sales volumes for those new products. In my experience, for new product introductions, sales forecast errors are generally incorrect by 25%, so I would plan for sales to range from 75% to 125% of my forecast.

Awesome, one more question, Gary interjected. Carlos, what are consumers expectations about the amount of protein to be included?

For frozen pizza, consumers expect no less than 10% protein content. If the protein content (e.g., chicken, beef, pork) exceeds 20%, consumers are unwilling to pay the increased price for the product. Since we want consumers to have an initial positive impression of our product, I recommend we include 20% chicken, 65% vegetables, and 15% spaetzels for Chicken Sensations.

Thanks, Carlos. That works great. If anything, I presume once we have consumer acceptance of Chicken Sensations we might substitute vegetables at $0.50 per pound or spaetzels at $0.15 per pound for chicken at $X.XX per pound to increase our profits, Gary finished.

Carlos, thanks for addressing Garys concerns. Now lets discuss the production and cost inputs, Vicki commented.

Sure, Vicki. Based on the case configuration of 12, 20-ounce bags, packaging cost will be $0.20 per bag for shipping to retailers. Each cardboard shipping box has a cost of $0.30 per box. At our processing facility, direct labor and variable manufacturing overhead costs per pound are $0.30 and $0.40, respectively. To retrofit the facility for USDA compliance, I anticipate spending an additional $X million, which we will depreciate over five years with no salvage value, Gary summarized.

I have everything I need from you, Vicki commented. The data Vicki gathered from Carlos and Gary are presented in Table 1. I should be able to prepare the preliminary financial feasibility analysis within the next few days. When we meet with Richard, I am confident he will want to discuss the impact of your assumptions on the financial feasibility of Chicken Sensations. When we are done with our meeting with Richard next week, I anticipate he will request a meeting with Parsons corporate executives to review our plans and request permission to launch Chicken Sensations. I am excited about the potential for Chicken Sensations. Its nutritious and tastes good, too. Thanks, again. See you soon.

1- Discuss the motivations of the following individuals in the case: a. Gary b. Carlos c. Vicki d. Richard