In the Super Project case, Crosby set out to argue that the current methodologies being utilized by General Foods Corporation to determine which capital investments to pursue did not always fit the bill. Crosby advocated using alternative methods for evaluation of Super including: 1) Incremental Basis, 2) Facilities Used Basis, and 3) Fully Allocated Basis. He provided the Corporate Budgets and Analysis management team with documentation that articulated each of the methods he used, the results obtained, discussion points, and ultimately his conclusions. As can be seen from the illustration below, each alternative provided vastly different outcomes, thus begging the question – which method should General Foods use? Our team analyzed Crosby’s suggested methods and then also included other capital budgeting techniques, such as IRR, NPV, and CBR. Using these concepts, we were able to compare and draw upon our own conclusions in order to provide a recommendation on whether to invest in the project or not. Crosby’s Analysis of 3 alternative investment evaluation techniques MethodAlternative I: Incremental Basis (Current Method)Alternative II: Facilities BasedAlternative III: Fully Allocated Basis Results
Crosby’s Analysis•Super will use existing facilities that could be used for future alternative uses – which is not used as part of evaluation criteria •Does not take into account opportunity loss•Puts various projects on common ground for purposes of relative evaluation•Overhead costs in the long run increase in proportion to level of business activity •Anticipates an increase due to the volume increase and new production technology Team’s Thoughts•Opportunity costs should be not be contemplated as part of the project investment decisions •Project evaluation is point in time and cannot account for all possible future considerations•In this case, Super is not being evaluated against the pursuance of another investment project. In some cases the costs of facilities were already accounted for in other equations thus becoming redundant or misleading to the current decision on hand. Team likes this approach when comparing between various options and needing to select the best project proposal•Since this a point in time evaluation, team recommends not using this element in the calculation of NPV.
State of the problem
In this case, it is noted that there are four categories of Capital investment projects: safety and convenience; quality; increase profit; and other. The “Super” investment fell in the category of “increase profit.” The key issue raised in this case was whether the incremental approach, as outlined in General Foods Corporation Accounting and Financial manual, should be applied when putting together a case for pursuing the Super project, or if one of the alternatives Crosby suggested above was a more accurate evaluation technique. This is the question that our team set to examine. Background
The Super project was a $200,000 capital investment request - $80,000 for Building modifications and $120,000 for machinery and equipment (packaging machinery) – to produce a new instant dessert offered in 4 different flavors. The plan was to utilize an existing building (with some small modifications) and the available capacity of an agglomerator – both of which were currently being used to manufacture the Jell-o product. In terms of financial projections, test market analysis demonstrated a potential 10% of total dessert market for Super – a majority of which would come from an increase in total market share for the powered dessert segment and a small amount from Jell-o sales erosion. In terms of production, the new packaging equipment had capacity of 1.9 million units on a 2-shift/5day workweek – which would result in excess capacity while the agglomerator that was going to be used was known to be unable to...