The Super Project In March $1967,$ Crosby Sanberg, a financial analysis manager at General Foods Corporation, told acase writer, "What I learned about incremental analysis at the Business School doesn't alwayswork." He was convinced that under some circumstances sunk costs were relevant to capitalproject evaluations. He was also concerned that financial and accounting systems did not providean accurate estimate of incremental costs and revenues, and that this was one of the most difficultproblems in measuring the value of capital investment proposals. Mr$.$ Sanberg used the Super project as an example. $1$ Super was a new instant dessert, based on a flavored, water$-$soluble, agglomerated powder. $2$ Although four flavors would be offered, it was estimated that chocolate would account for $80\%$ of total sales.General Foods was organized along product lines in the United States, with foreign operationsunder a separate division. Major U$.$S$.$ product divisions included Post, Kool$-$Aid, Maxwell House,Jell$-$O$,$ and Birds Eye. Financial data for General Foods are given in Exhibits $1,2,$ and $3.$The $$200,000$ capital investment project request for Super involved $$80,000$ for buildingmodifications and $$120,000$ for machinery and equipment. Modifications would be made to anexisting building, where Jell$-$O was manufactured. Since available capacity of a Jell$-$Oagglomerator would be used in the manufacture of Super, no cost for the key machine wasincluded in the project. The $$120,000$ machinery and equipment item represented packagingmachinery. The Market A Nielsen survey indicated that powdered desserts constituted a significant and growing segmentof the total dessert market, as shown in Table A $($next page$).$ On the basis of test marketexperience, General Foods expected Super to capture a $10\%$ share of the total dessert market.Eighty percent of this expected Super volume would come from growth in total market share or growth in the powders segment, and $20\%$ would come from erosion of Jell$-$O sales. Production Facilities Test market volume was packaged on an existing line, inadequate to handle long$-$runrequirements. Filling and packaging equipment to be purchased had a capacity of $1\mathrm{.}9$ million unitson a two$-$shift, five$-$day workweek basis. This represented considerable excess capacity, since$1968$ requirements were expected to reach $1\mathrm{.}1$ million units, and the national potential was $1$ The name and nature of this new product have been disguised to avoid the disclosure of confidential information. $2$ Agglomeration is a process by which the processed powder is passed through a steam bath andthen dried. This fluffs up the powder particles and increases solubility. $1-209$dfc$44$e$3.$png$1-209$dfc$44$e$3.$png$1-209$dfc$44$e$3.$png regarded as $1\mathrm{.}6$ million units. However, the extra capacity resulted from purchasing standardequipment, and a more economical alternative did not exist. TABLE ADessert Market, August$-$September $1966$ Compared with August$-$September $1965$ Market Share Change from Aug.$-$Sept$\mathrm{.}1965$ Desserts Aug.$-$Sept. $1966$ Share Points Volume $(\%)$ Jell$-$O $...................................................19\mathrm{.}0\%3\mathrm{.}640\mathrm{.}0$Tasty..................................................... $4\mathrm{.}04\mathrm{.}0($new$)$Total powders.................................. $25\mathrm{.}37\mathrm{.}662\mathrm{.}0$Pie fillings and cake mixes $.................32\mathrm{.}03\mathrm{.}9($no change$)$Ice cream $.............................................42\mathrm{.}73\mathrm{.}45\mathrm{.}0$Total market.................................... $100\mathrm{.}0\%13\mathrm{.}0$ Capital Budgeting Procedure The General Foods Accounting and Financial Manual identified four categories of capitalinvestment project proposals: $(1)$ safety and convenience; $(2)$ quality; $(3)$ increased profit; and $(4)$other$.$ Proposal procedures and criteria for accepting projects varied according to category $($Exhibit$4).$ In discussing these criteria, Mr$.$ Sanberg noted that the payback and return guidelines were notused as cutoff measures and added: Payback and return on investment are rarely the only measures of acceptability.Criteria vary significantly by type of project. A relatively high return might berequired for a new product in a new business category. On the other hand, amuch lower return might be acceptable for a new product entry whichrepresented a continuing effort to maintain leadership in an existing business by$,$for example, filling out the product line. Super fell into the third category, as a profit$-$increasing project. Estimates of pay back and return onfunds employed were required for each such project requiring $$50,000$ or more of new capitalfunds and expense before taxes. The payback period was the length of time required for theproject to repay the investment from the date the project became operational. In calculating therepayment period, only incremental income and expenses related to the project were used.Return on funds employed $($ROFE$)$ was calculated by dividing $10-$year average profit before taxesby the $10-$year average funds employed. Funds employed included incremental net fixed assetsplus or minus related working cap