Colombo frozen yogurt case study solution

Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

5- 2 Colombo Soft-Serve Frozen Yogurt

In 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 segments - independent shops and impulse locations such as cafeterias, icolleges, and buffets. Frozen yogurt is the main business for the shops whereas yogurt is incremental to the impulse locations' main business. GMl's large sales force already served the impulse market.

The [mancial results in the first couple of years were mixed. Earnings increased slightly and then dropped each year even though sales volume was relatively flat. In total, merchandising costs dropped, while pricing promotion rates escalated. The GMI sales force focused on the impulse segments and pricing promotions were believed to be driving volume increases. However, volume in the shop segment declined at alarming rates and there was widespread dissatisfaction in the sales organization. While GMI knew sales by segment, they didn't track costs by segment. Instead costs were allocated based on sales dollars. The situation was ripe for a clearer look using ABC methods..

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! TODAY'S FROZEN YOGURT MARKET STRUCTURE:

When Colombo Yogurt Company began marketing soft-serve frozen yogurt in the early 1980's, their main distribution was through independent yogurt shops. In the early 90's, they faced competition from franchise operations such as TCBY and Freshens that replaced many of the independent yogurt shops. And the market changed as Foodservice operators such as cafeterias, colleges, and buffets started to add soft-serve yogurt to their business. By the late 90's, these Impulse locations accounted for 2/3 of the soft-serve market.

:In the late 90's, Shop sales began to increase with the addition of distinctive new products such as smoothies, boosters, and granitas. The Shops make their living from the soft-serve business and must innovate or go out of business (as thousands have done in the last decade). On the other hand, the Impulse locations 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 like smoothies or granitas.

THE GMI-COLOMBO MARKETING PLAN:

;The GMI Foodservice Division markets 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.

Salesforce: Colombo's salesforce was merged into the Foodservice salesforce. Customers were reassigned to salespeople who already serviced that geographical area. The salespeople varied in their reaction to the product. Some found shops easy to sell to while others avoided the shops despite the possible lost commission. Many spent a lot of time helping their impulse customers understand how to use the machinery.

. Merchandising Promotions: Colombo traditionally charged the Shops for merchandising that was large scale and ; eye popping (neon signs). The Shops used these signs to draw customers inside. GMI chose not to charge for merchandising and to provide the same large scale merchandising to both Shops and Impulse locations. Shops were very interested in the kits while many Impulse locations didn't even hang them up.

Pricing Promotions: Pricing promotions are a mainstay ofGMI's impulse location approach. GMI's salesforce generally used these promotion events as an opportunity to visit their accounts and take advantage of the occasion to meet service needs and sell other products that may not be featured.

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Chapter 05 - Activity-Based Costing and Customer Profitability Analysis

r"' GMI made price promotions available to both segments of the market. While the deals were typically around $5 per case, they averaged $3 per case against all the volume shipped during the year. GMI marketing knew price was not a major decision factor for Shops and they did not target pricing promotions to them. However, Shops were aware of the promotions and took advantage of them.

THE BUSINESS STATUS - PRE-ABC:

PROFIT AND LOSS BY SEGMENT - PRE-ABC

Cost of Goods Sold is made up of$14,250,OOOfor ingredients, packaging, and storage and $3,000,000 for pick/pack and shipping. Since the product is the same across segments, the cost to produce should be the same. However, pick/pack and shipping costs were found to vary with whether or not the order was for a full pallet. Full pallets cost $75 to pick and ship whereas individual orders cost $2.25 per case. There are 75 cases in a pallet and the segments

, differ in their utilization of full pallets as shown below.,

ABC ANALYSIS OF MERCHANDISING:

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:Merchandising costs consist mainly of kits costing $500 each. A review of where the kits were sent indicated that 3,450 kits were sent out and 90 of them were sent to shops.

ABC ANALYSIS OF SELLING, GENERAL AND ADMINISTRATIVE:

Since sales representatives service several products, their costs are allocated to the various products based on gross sales dollars. GMI gave diaries to 10% of the sales force in randomly selected markets of the country and asked

! them to track their time in activity classifications for 60 days. The diaries indicated that sales reps spent almost 3 !times as much time on the yogurt than GMI had estimated. The total allocation to Yogurt jumped from $1,185,000 to $3,900,000. Of their time spent on Yogurt, only 1% of the time was spent on the shops.

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- - - ---

Category Impulse Segment Yogurt Shops Total

Sales in cases 1,200,000 300,000 1,500,000

Sales revenue $23,880,000 $5,970,000 $29,850,000 Less: Price Promotions -$ 3.600.000 -$ 900.000 -$ 4.500.000 Net Sales $20,280,000 $5,070,000 $25,350,000 Less: Cost of Goods Sold -$13.800.000 -$3.450.000 -$17.250.000 Gross Margin $ 6,480,000 $ I,620,000 $ 8,100,000 Less: Merchandising -$ 1,380,000 -$ 345,000 -$ 1,725,000

!Less: SG&A -$ 948.000 - $ 237.000 - $ I.I 85.000 ;Net income $ 4,152,000 $1,038,000 $ 5,190,000

ABC ANALYSIS OF COST OF GOODS SOLD: ""

Impulse Segment YOgurtShops Total Cases in full Pallets 60,000 240,000 300,000 Individual cases 1,140,000 60,000 1,200,000 Total cases 1,200,000 300,000 1,500,000

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