Week 7 Compagnie du Froid Final PDF

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Week 7 Team CaseSteven Needham, Brett Travis, Amy Hughes, Edward CarnegliaCompagnie du Froid, S.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?Traditionally, Jacques has given...

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Week 7 Team Case Steven Needham, Brett Travis, Amy Hughes, Edward Carneglia 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? Traditionally, Jacques has given 2% of corporate profits as a bonus paid to each manager. Therefore, with a combined total corporate profit before interest and taxes between the three regions of approximately $1,610,000, each manager would receive about $10,730 bonus for 2009. See the below breakdown of the profit and bonus paid (in ‘000).

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? This distinction is important for performance measurement because it allows managers and upper management to identity the root cause for a decrease (or unexpected increase) in budgeted spending and profits. Identifying the root cause allows managers to effectively manage these costs/profits and take appropriate action to resolve or monitor them. Without this identification, management would implement changes and policies to fix profits based on gut

feeling which will almost always lead to failure. Additionally, this provides a better understanding for why profits might be falling if they are out of the control of management then management cannot be blamed. 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: a. What is the standard contribution per liter of product? (Standard contribution is the budgeted contribution margin divided by the budgeted volume in liters.) The standard contribution per liter of product can be calculated by dividing the total sales of ice cream in volume of liters by the total contribution margin. Therefore, the contribution per liter for the French and Italian region are;

b. How much additional product was sold due to the change in average temperature? What affect did this have on profitability?

The actual change in predicted average temperature for each region was not extreme or out of ordinary. In the French region the temperature measured about 0.6C below average. In the Italian region the temperature measured about 0.1C above average. The Spanish region saw the largest change in average temperature measuring at 1.7C below average. Although Jacques believes that temperature can play a role with sales volume, the two variables do not show a strong correlation with one another when compared graphically. In fact, the correlation R2 value calculated between France, Spain and Italy was determined to be 0.013, 0.004 and 0.052 respectively. Therefore, an accurate prediction of additional product sales and profitability due to temperature changes cannot be determined. A more accurate prediction/estimate can be determined by estimating volume growth per year as these two variables are better correlated. It appears that each region saw a higher than expected growth in sales volume as compared with the trend line seen over the years. See appendix I for a graphical comparison. c. 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? The affect of market share variance, market size variance and sales variance was estimated for the French region as the estimated market size/share was not given for the other two regions. Based on the previous market share of 20% for the French region in 2007, this market share was used to estimate the total market size in 2009 based off the budgeted sales volume and the affect of the market share drop to 18% had on volume and sales. Because the sales rose from the budgeted 4,455 to the actual 5,023 for 2009, assuming the market share was maintained at 20%, this had a favorable increase to the Market Size Variance of about $1,049,680. However, because the actual market share did decrease from the estimated 20% to 18% for 2009, this had an unfavorable decrease to the Market Share Variance of about $928,270. Therefore, the total Sales Variance in the French Region in 2009 had just a slight favorable

increase of about $121,420. This difference due to a decrease in market share is substantial considering the French region had an operating profit for 2009 of $1,242,000. Profit could have almost doubled if market share was maintained at 20%.

d. The budget plan called for 10% of volume to come from specialty products. What was the actual % of volume 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. The actual percent of sales volume from specialties between France, Italy and Spain were; 8.1%, 10.0% and 10.1% respectively.

A shift in the product mix would change the profits because specialty ice cream has a greater contribution margin per unit (volume) as regular ice cream. e. 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. The actual price in the French and Spanish regions was lower than the budgeted price, contributing to an unfavorable decrease in profit of about $904,000 and $296,000 respectively.

The actual price was just $0.01 higher than the budgeted price in the Italian region that contributed to a favorable profit increase of about $10,000.

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. See appendix 1. 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. See appendix 1.

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. See appendix 2 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. See appendix 2. 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? The Transfer price was determined at the standard full price as determined by Jacques. This decision included allocated fixed costs - such as depreciation and S&A expenses as well. The Spain regional manager was understandably upset at the pricing decision - because he was paying for a cost that was already being paid for from his region- essentially "double dipping" in the fixed cost requirement. If the transfer price had only included the actual costs (ingredients and labor) and excluded the irrelevant fixed costs - the outcome might have provided a more appropriate transfer price. France and Spain regional managers both have a vested interest in the transfer price as the managers year-end bonuses are directly correlated to the regions performance. Divisions outside the sending/receiving areas should not care what the transfer price is, unless for some reason, one region was selling product for a price significantly lower or higher than the other regions.

9. Discuss the strategic implications of the French Division’s 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. The largest strategic implication of the French Division expanding its side business of deliveries is that it is simply not part of Compagnie du Froid, S.A. core competency. The regional manager, Jean, saw it as an opportunity to increase revenues by taking on the "side" work - adding food deliveries in a refrigerated vehicle that was already in use and making similar deliveries. A potential negative of this practice is the possibility Compagnie du Froid, S.A. name gets tarnished through the food delivery practice. If a customer becomes dissatisfied, even if it’s outside of the delivery drivers control, the impact could be significantly reflected on Compagnie du Froid. Another potential negative risk is that the French region begins to focus too much on the delivery aspect instead of supporting the Jaques vision of creating a year-round ice cream operation in Paris. Contrarily, the delivery side business could have positive implications on the company. Food deliveries are assumingly a year-round requirement, in this instance, and could provide profit in the off-season. Additionally, the food delivery side business could also help advertise the Compagnie du Froid, S.A., increasing revenues and market share.

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? The Spanish region has some room for improvement like increasing the actual price per volume of ice cream to meet or exceed the budgeted price that would contribute to higher profits and improved performance from the manager. Overall, the manager has performed as expected, delivering favorable results (variances) in variables they can control like raw material costs and labor. Although temperature has been shown to not correlate with sales volume, the Spanish region did experience a much lower temperature drop as expected (1.7C) that was not seen with

the other two regions. Therefore, some additional consideration should be accounted for as this temperature drop did not impact the other two regions as severely.

APPENDIX 1

APPENDIX 2...