Colombo frozen yogurt case study solution

Colombo Frozen Yogurt Activity-Based Costing Applied to Marketing Costs
Subject
Business Finance

School
no school

Question Description
Please read the attached case and write up the case answering the following question

Assume you are in charge of providing information and suggestions to the Food Services Division Manager1. Complete the new segment profitability statements
In a memo to the Food Services Division Manager discuss the changes that you would suggest be made. Include Specific examples and explanations.
Case 6 Colombo Frozen Yogurt Activity-Based Costing Applied to Marketing Costs Jon Guy, Director, Financial Operations Foodservice, General Mills Inc. Jane Saly University of St. Thomas Abstract: Marketing costs are coming under increased scrutiny, and activity-based costing (ABC) is often the tool used to analyze such costs. ABC is useful because it requires the identification of cost drivers and provides information that is directly applicable to decisions about marketing costs and benefits. This case illustrates the application of activity-based costing to marketing costs in a food manufacturer. It illustrates how marketing support costs may differ across two channels of distribution. This information is very useful for understanding profitability in the two channels and for decisions about how to service the two channels. I n 1994, General Mills Incorporated, a $6 billion consumer goods company, acquired Colombo Frozen Yogurt. General Mills Inc. (GMI) believed they could add Colombo frozen yogurt to their existing product lineup to increase net sales with little addition in marketing cost. Frozen yogurt is sold through two distinct market segments—independent shops and impulse locations such as cafeterias, colleges, and buffets. The shop business revolves around frozen yogurt and specialty items made from yogurt. In the impulse segment, yogurt is an add-on to the main business. GMI’s large sales force already served the impulse market with brand items such as Cheerios, Gold Medal Flour, Betty Crocker, Chex Snacks, and so on. The financial results in the first couple of years were mixed. Profits increased along with sales volume. However, when sales hit a plateau, earnings dropped. The sales people were dissatisfied with yogurt sales and said their customers weren’t happy either. The GMI sales force focused on the impulse segments and saw increases in volume there. However, volume in the shop segment declined at alarming rates. While GMI knew sales by segment, they didn’t track costs by segment. Instead costs were allocated based on sales dollars. Therefore, they needed a new method to track costs—activity-based costing. Frozen Yogurt Market Structure Colombo Yogurt Company, an early innovator in the frozen yogurt market, did well during the early craze when customers flocked to frozen yogurt as a healthy alternative to ice cream. As the market continued to develop, Colombo chose to market mainly to independent shop owners. As a result, Colombo lost customers when franchise operations such as TCBY encouraged independent shops to become a franchise and purchase the product from the franchiser. In the early 90s, the market changed again as food service operators such as cafeterias, colleges, and buffets started to add softCopyright © 2000 by Institute of Management Accountants, Montvale, NJ 67 serve yogurt to their business. By the late 90s, these impulse locations accounted for two-thirds of the soft-serve market. The economics of shops is similar to that of restaurants. The shops focus on maximizing profit per square foot. While they are aware of food cost, shop owners are rooted in a culture dominated by guest counts (new and repeat) and check averages. These variables are more linked to the kind of customer referrals where word of mouth brings in new customers and the total experience brings them back again. The key variable is the quality of the product and experience (service and feeling). To compete with other shops, they must innovate by adding distinctive new products such as smoothies, boosters, and granitas. Otherwise they may go out of business as thousands have done in the last decade. The economics of impulse locations is very different. They make their living from other items, and the soft-serve trade is only performance topspin. These firms are unwilling to take any risk (new equipment or extra labor) to serve highly differentiated products such as smoothies or granitas. They generally are interesting in providing a quality service for a reasonable price. They typically measure performance with cost per serving, and they have a difficult time understanding profit contribution as opposed to food cost. Impulse locations are typically small. The GMI-Colombo Marketing Plan It was the impulse business in the Foodservice operations that made Colombo an attractive acquisition for General Mills. The GMI Foodservice Division was already marketing brands such as Cheerios, Yoplait, Betty Crocker, Gold Medal Flour, Hamburger Helper, Pop-Secret, and Chex Snack to food management firms, hospitals, and schools. Colombo yogurt was added to this product lineup, and the Foodservice sales force covered both shop and impulse locations. Sales Force Colombo’s sales force was merged into the Foodservice sales force. Customers were reassigned to sales people who already serviced that geographical area.