5-42 Using ABC for activity-based management (ABM).

Jenny Chen is in charge of marketing at General Mills. Jenny reports to Mark Hamin, vice-president of product development. Mark has tasked Jenny with analyzing the different channels used to market its Colombo frozen yogurt products to find the best path to profitability. Jenny has decided to take an ABC/ABM approach to analyzing the operations at General Mills. Currently, General Mills charged the same prices and provided the same promotions-$3 per case- to its customers, whether the customer was in the grocery channel (food purchased for later consumption or preparation at home) or the food-service (outside of home, immediate consumption) channel. Jenny quickly noticed there were two segments within food service: destination yogurt shops or restaurants and impulse locations, located in business cafeterias and on school campuses and military bases. She also noticed that sales dollars for frozen yogurt pro ducts were relatively constant, but profits were declining. Jenny sensed that destination yogurt shops might be more profitable than impulse locations, but the company didn't have the information about profit differences to make changes. The case sales data and income statements for last year, by segment, looked like this:

Category Impulse Location 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: Promotions 3,600,000 900,000 4,500,000

Net sales 20,280,000 5,070,000 25,350,000

Cost of goods sold 13,800,000 3450,000 17,250,000

Gross margin 6,480,000 1,620,000 8, 100,000

Less: Merchandising 1,380,000 345,000 1725,000

Less: Selling, general, and admin. expenses 948,000 237,000 1, 185,000

Net income $ 4, 152,000 $1,038,000 $ 5, 190,000

Additional cost data: Cost of goods sold includes $14,250,000 for ingredients, packaging, and storage, and $3,000,000 for picking, packing, and shipping. The product is the same across segments, so cost to produce is the same. However, picking, packing, and shipping costs vary if the order is for a full pallet. Full pallets cost $75 to pick and ship, where individual orders cost $2.25 per case. There are 75 cases in a pallet, with pallet and case usage by segment shown here:

Segment

Impulse Location Yogurt Shops 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

Sales and merchandising kits sell for $500 each. A total of 3,450 kits were delivered in the period, 90 of them to yogurt shops. For selling, general, and administration, costs were allocated to products based on gross sales dollars. Jenny investigated and found when a random sample of the sales force was asked to keep diaries for 60 days, the resulting data revealed they spent much more time per sales dollar on yogurt sales than other General Mills pro ducts. Jenny found when selling, general, and administration costs were allocated based on time, the total allocation to yogurt products jumped from $1, 185,000 to $3,900,000. Of the total time spent on selling Colombo frozen yogurt, only 1% of that time was spent in shops.

Required 1. How do the two segments identified by Jenny for Colombo frozen yogurt sales differ from each other?

2. Using ABC analysis, restate the income statements above to show new net income (Hint: add a line item for shipping). What is "per case" net income?

3. Based on your analysis in requirement 2, what changes should General Mills make?