Compagnie Du Froid

Topics: Transfer pricing, Price, Cost Pages: 8 (2463 words) Published: January 31, 2013
Case Analysis Report on: Compagnie du Froid
Executive Summary
This case study describes an ice cream manufacturer, Compagnie du Froid S.A., founded by Jacques Truman’s father in 1985. It is a major competitor in the industry during summer and has presence in France, Italy and Spain. Compagnie du Froid practices decentralization in its organization, where each region is managed by a competent manager empowered to make business decisions in the best interest of the company.

Traditionally, the business performance of each regional manager is measured against a set profit plan, with Jacques rewarding his managers a fixed payout of 2% of corporate profits as a bonus. However, the organization is facing many business firsts, which when analysed, raises questions as to whether the fixed 2% payout truly rewards the regional managers for successful effort, or unfairly penalizes for situations out of the managers’ control. Some of the issues discussed in this report include:

1. An apparent poorly performing Spain negatively impacting the overall corporate performance.
2. An apparent outperforming France showing a larger than 20% growth year on year.
3. An Italy that has achieved targets, and expanded its reach.
4. The inter company transfer of products between two regions (France to Spain) based on the cost plus method of transfer pricing.
5. France having ventured into distribution, which is not Compagnie du Froid’s core business.

On further examination, Spain’s poor results was due to a confluence of several negative factors, some of which were out of the regional manager’s control: a lower-than-average temperature change of 1.7ºC, frequent failure of new machinery, stock outs during crucial periods, cost plus 5% transfer arrangement from France and price erosion from fierce competition.

The factors mentioned above call for appropriate methods of performance measurement to be developed to assess each region instead of the current blanket profit plan. An appropriate method that weights multiple facets of performance that are within the regional manager’s control would serve to incentivize and drive appropriate behaviour. This case analysis employs the budget variation analysis method and flexed budget to assess the business performance and identify variation in the areas of Sales Volume and Price, Materials Usage and Price, Labour Efficiency and Price, and Fixed Overhead Spending. Combined with standards set in the profit plan, the analysis will provide detailed insight into each region’s performance and highlight areas that need improvement.

Ultimately, this case analysis answers the following questions put forward for discussion on Session 8 of this module: 1.What problems is Jacques Trumen facing?
2.What are the team’s recommendations to Jacques?

Problem Statements
The firm faces several issues at a time when it has been pursuing ambitious growth targets. The issues are summarized as below: 1.The current method of using the profit plan to track business performance may not be sufficient. 2.If so, are there alternative methods of performance measurement? 3.Are there alternative methods of performance measurement that give greater resolution and/or clarity into each entity’s contribution to the overall business? 4.How will entering the distribution business affect the current business? 5.Should Compagnie du Froid pursue the distribution business? Careful consideration should be taken as implementing erroneous solutions would dampen future growth prospects and curb intended expansion. As such, the issues listed above shall form the basis for the subsequent analysis of this case. Each of Compagnie du Froid’s business units faces unique challenges that have to be dissected a unit at a time. In the subsequent section, the team will analyse each unit’s performance and list gaps between their actual and potential performance and the possible reasons that led to the current situation.

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