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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:
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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:
The firm faces several issues at a time when it has been pursuing ambitious growth targets. The issues are summarized as below:
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.
From the information provided in Exhibit 2, it appears that France had an outstanding performance in 2009, exceeding growth expectations by 13%. It recorded a profit of €1,242,000 even though the region was experiencing a lower-than-average summer temperature (lower by 0.6 ºC). As highlighted in the case, a large part of the outstanding performance came from an unexpected need to support demand from the Spanish region to the tune of 603,000 litres of ice cream.
To reveal a more realistic situation, applying the flex budget method does indeed prove this point: adjusting for the 603,000 litres shows a small increase of 5,000 litres of ice cream volume and lower specialty ice cream volume. As shown in the Excel screen capture, the flexed budget adjusts line items for labour, raw materials, and supervision, energy and maintenance to account for the increase in volume, while assuming that fixed cost/expense items such as depreciation, delivery, selling expense, advertising, rent, administrative salaries and central office expense remain the same. With the adjustments, actual profit is €XXX above/below the flexed profit of €XXX. Further analysis of favourable and adverse variances reveals other factors of interest:
The analysis on the core ice cream business suggests that France would have performed poorly if not for the unexpected volume it transferred to Spain. However, there is no information provided on the revenues from the distribution business, and there is no way to determine if the revenues and/or potential revenues could have justified the France regional manager’s attention away from Compagnie du Froid’s core business. Assuming that the distribution revenues are not significant, it leads to the conclusion that perhaps Jean should not have expanded his reach so aggressively at the expense of his business relationships in the east coast, instead, focusing on sustainable growth gradually. Jean probably also should spend less attention on the distribution opportunity.
Consider information from Exhibit 3 provided in the case. In 2009, Italy experienced temperatures just 0.1ºC above the summer average, but yet was able to achieve a €58,000 profit above plan, exceeding growth expectations by 1.28%. As described in the case, Italy’s profit plan had already been adjusted for lower efficiency to account for the old equipment transferred from France as well as for expected higher local wages due to the market conditions. Due to the difference in sales volume between budget and actual, Exhibit 3 was revised by applying a flexed budget to allow comparisons to be made on actual performance.
As shown in the Excel screen capture, the flexed budget adjusts line items for labour, raw materials, and supervision, energy and maintenance to account for the increase in volume, while assuming that fixed cost/expense items such as depreciation, delivery, selling expense, advertising, rent, administrative salaries and central office expense remain the same. With the adjustments, actual profit is €9,000 above the flexed profit of €507,000. A further analysis of favourable and adverse variances reveals that there were other factors contributing to the better-than-expected performance:
Taking all of the above into consideration, the fortunate outcome of higher sales coupled with an overall lower raw materials price allowed Italy to exceed target. Hence, it could be said that Italy did not exceed target because of management’s outstanding performance: it did so because of several external factors.
Exhibit 4 of the case quantifies the result of several factors leading to the €149,000 loss:
As the budgeted sales volume was different from the actual performance, Exhibit 4 was also revised by applying a flexed budget to allow for comparisons.
With the flexed budget having been adjusted for labour, raw materials, and supervision, energy and maintenance to account for the increase in volume, while assuming that fixed cost/expense items such as depreciation, delivery, selling expense, advertising, rent, administrative salaries and central office expense remain the same, a flexed profit of €577,000 is revealed. This is much more commendable than the apparent €149,000 loss reported. As with the previous regions, further analysis of favourable and adverse variances reveals other factors:
Hence, considering the significantly lower selling price of the products due to aggressive competition, coupled with the decision to maintain advertising, absorbing travel expenses and shipping, Spain actually performed admirably.
Multiple methods are available for consideration, such as TNMM, TPM, Cost Plus, CUP, Profit Split, Resale Price, etc (itinet.org). While the team feels that the most appropriate method is the cost plus method adopted by Compagnie du Froid, the recommendation is that some modification be applied to it. The team feels that it might be unfair to build allocated costs into the transfer price. As there is already a 5% markup, direct variable costs such as ingredients, labour and energy should naturally be included, while the other line items should be excluded. Jacques must establish a clear and explicit transfer pricing policy.
The team feels that basing the current reward system fully on the overall corporate profit may not provide Jacques with enough resolution to accurately assess and reward each regional manager. Instead, we recommend a list of possible areas of performance measures that could capture a more holistic picture of the managers’ overall performance, each weighted according to Jacques’ perception of importance in the overall scheme of things in Compagnie du Froid. This could include the following:
As these areas are under direct control of the regional managers, tagging them to their performance assessment will drive the right behavior, where previously, they would have been apathetic as any effort would not have been recognized, nor the lack of effort penalized. Furthermore, by weighting each element, Jacques will have more levers with which to tailor the behavior he wants for each region.
From the analysis in the prior sections, there is no question about Italy’s eligibility for the bonus. For France, as the current plan does not provide sufficient resolution to differentiate sales from transfers from true market growth, it is eligible for the bonus as well. However, the team feels that this is unfortunate, as it is rewarding Jean for profiting at another region’s expense.
Finally, for Spain, it is clear that the transfer policy currently in place is a major cause of its underperformance, with some other contributing factors (lower summer temperatures, price erosion from competition, etc) also being out of Andres’ control. As shown in the flexed budget in the previous section, it is also clear that factoring for these circumstances, Spain would have shown a profit. Thus, the team feels that Jacques could make an exception for this situation and award a partial bonus to Andres, instead of no bonus.
The €79,000 revenue from distribution has negligible impact on France’s (much less Compagnie du Froid as a whole) core business performance. Without additional information to assess potential future revenues as well as profitability, the team feels that Compagnie du Froid should keep a sharp eye on activities here to assess impact on its core business. While there is currently no noticeable negative effect from the distribution business, the decision to expand further into this area would depend on the outcome of a detailed analysis (financial, economic, etc) including consideration of its assets, labour and potential profitability.
One facet of this analysis that the team noticed was the lack of control of raw materials prices resulting in each region having exposure to price fluctuations and hence leading to uncertainty in performance. To circumvent this, perhaps Jacques should consider consolidating Compagnie du Froid’s vendors to enjoy economies of scale. He could qualify one or perhaps two key vendors to supply his entire business. Bulk purchases enjoy economies of scale, and further to this, Jacques could negotiate some sort of contract pricing to hedge against raw materials price uncertainty.
In summary, applying the flexed budget method and adjusting for variances allows businesses to better assess performance without any ambiguity. Further, a clear transfer policy should also be implemented so that disagreements are minimized and a more accurate measure of performance can be achieved for both the selling and buying units.
Also, a performance dashboard that monitors various cost and revenue aspects of the unit will help to drive desired behavior and quickly highlight areas of the business that need attention and move beyond simply measuring sales or production only. It would have allowed Jacques to quickly realize that France has good margins on specialties ice cream but was not capitalizing on the opportunity by not aggressively expanding its specialties volume. Such a dashboard would also have highlighted that Italy’s Labour hours is among the three regions’ lowest and requires attention.
An ice cream manufacturer, Compagnie du Froid S.A. (2016, Nov 26). Retrieved from https://studymoose.com/an-ice-cream-manufacturer-compagnie-du-froid-s-a-essay
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