In 1967, General Foods was considering to expand their portfolio with a new product called Super. Super was a dessert supposed to penetrate a dessert market in growth. The investment required $200K, $80K for building modifications and $120K for machinery and equipment. General Foods already had an agglomerator that could be used to manufacture Super. The $120K was meant to pay for packaging machinery. In order to decide whether to accept or decline this project, an investment evaluation was required. It is important to note that this proposal was related to increase profits.
Investment Evaluation Techniques
This was a commonly used technique at General Foods. However, General Foods only considered directly identified incremental revenue. That means that the Jelly-O facilities they were supposed to use was not included and therefore Crosby Sanberg did not see the incremental basis as an worthy evaluation technique.
The conclusion after evaluation the facilities-used technique proposes that an investment in a new facility is necessary. They also added money from point A to point B in the same pile of money (capital), which is not relevant in capital budgeting.
Fully Allocated Basis
This approach fortunately takes overhead expensen into consideration, which is important. The fully allocated basis is the technique Crosby Sanberg want to pursue in order to evaluate Super’s ROFE.
Evaluation technique and estimated ROFE:
Incremental Basis – 63 %
Facilities-Used Basis – 34 %
Fully Allocated Basis – 25 %
Dialogue between relevant employees
The evaluations mentioned above was done by Crosby Sanberg and was sent to J. E. Hooting, Director for Corporate Budgets and Analysis. Hooting agrees with Sanberg’s perspective, but want to have J. C. Kressling, Corporate Controller’s comment on the subject. After reading Kresslin’s reply, it brings up the question: Which of the...