Colombo Soft-Serve Frozen Yogurt CaseQuestions
After reading the Colombo Soft-Serve Frozen Yogurt Case Study(SEE BELOW) answer the first six questions below.Please type your answer to the questions below in a Word documentand send in through the designated drop box. Please be sure tofully answer each question. Most questions (with the exception ofquestion 3 and 4) will require at least three to five sentences toanswer.
1. Briefly summarize Colomboâs competitive environment
2. Describe General Millsâ strategy in response to the competitiveenvironment?
3. Finish filling out the numbers on the Profit/Loss statement forColombo Yogurt (attached) using ABC techniques. Be sure and watchthe Colombo Yogurt teaching clip that explains in detail how tobreak down the numbers on the Colombo Yogurt profit and lossstatement using ABC techniques.
4. Using the ABC analysis you completed on the worksheet answer thefollowing questions.
- Which segment has the most sales revenue?
- Which segment has the largest net income?
5. What does the ABC analysis reveal? Be sure and look at whatdrives the cost and be specific.
6. What changes would you suggest to help General Mills? Youranswer should reflect something that you observed by looking at theprofit/loss statement before and after the activityanalysis.
5- 2 Colombo Soft-Serve Frozen Yogurt
In 1994, General Mills Incorporated, a $6 billion consumer goodscompany, acquired Colombo Frozen Yogurt.
General Mills Inc. (GMI) believed they could add Colombo frozenyogurt to their existing product lineup to increase
net sales with little addition in marketing cost.
, Frozen yogurt is sold through two distinct segments - independentshops and impulse locations such as cafeterias,
icolleges, and buffets. Frozen yogurt is the main business for theshops whereas yogurt is incremental to the impulse
locations' main business. GMl's large sales force already servedthe impulse market.
The [mancial results in the first couple of years were mixed.Earnings increased slightly and then dropped each year
even though sales volume was relatively flat. In total,merchandising costs dropped, while pricing promotion rates
escalated. The GMI sales force focused on the impulse segments andpricing promotions were believed to be driving
volume increases. However, volume in the shop segment declined atalarming rates and there was widespread
dissatisfaction in the sales organization. While GMI knew sales bysegment, they didn't track costs by segment.
. Instead costs were allocated based on sales dollars. Thesituation was ripe for a clearer look using ABC methods.
TODAY'S FROZEN YOGURT MARKET STRUCTURE:
When Colombo Yogurt Company began marketing soft-serve frozenyogurt in the early 1980's, their main
distribution was through independent yogurt shops. In the early90's, they faced competition from franchise
operations such as TCBY and Freshens that replaced many of theindependent yogurt shops. And the market
changed as Foodservice operators such as cafeterias, colleges, andbuffets started to add soft-serve yogurt to their
business. By the late 90's, these Impulse locations accounted for2/3 of the soft-serve market.
:In the late 90's, Shop sales began to increase with the additionof distinctive new products such as smoothies,
boosters, and granitas. The Shops make their living from thesoft-serve business and must innovate or go out of
business (as thousands have done in the last decade). On the otherhand, the Impulse locations make their living
from other items and the soft-serve trade is only performancetopspin. These firms are unwilling to take any risk
(new equipment or extra labor) to serve highly differentiatedproducts like smoothies or granitas.
THE GMI-COLOMBO MARKETING PLAN:
The GMI Foodservice Division markets brands such as Cheerios,Yoplait, Betty Crocker, Gold Medal Flour,
Hamburger Helper, Pop-Secret, and Chex Snack to Food ManagementFirms, Hospitals, and schools. Colombo
yogurt was added to this product lineup and the Foodservice salesforce covered both Shop and Impulse locations.
Salesforce: Colombo's salesforce was merged into the Foodservicesalesforce. Customers were reassigned to
salespeople who already serviced that geographical area. Thesalespeople varied in their reaction to the product.
Some found shops easy to sell to while others avoided the shopsdespite the possible lost commission. Many spent a
lot of time helping their impulse customers understand how to usethe machinery.
. Merchandising Promotions: Colombo traditionally charged the Shopsfor merchandising that was large scale and
; eye popping (neon signs). The Shops used these signs to drawcustomers inside. GMI chose not to charge for
merchandising and to provide the same large scale merchandising toboth Shops and Impulse locations. Shops were
very interested in the kits while many Impulse locations didn'teven hang them up.
Pricing Promotions: Pricing promotions are a mainstay ofGMI'simpulse location approach. GMI's salesforce
generally used these promotion events as an opportunity to visittheir accounts and take advantage of the occasion to
meet service needs and sell other products that may not befeatured.
5-8
Chapter 05 - Activity-Based Costing and Customer ProfitabilityAnalysis
r"' GMI made price promotions available to both segments of themarket. While the deals were typically around $5 per
case, they averaged $3 per case against all the volume shippedduring the year. GMI marketing knew price was not a
major decision factor for Shops and they did not target pricingpromotions to them. However, Shops were aware of
the promotions and took advantage of them.
THE BUSINESS STATUS - PRE-ABC:
PROFIT AND LOSS BY SEGMENT - PRE-ABC
Cost of Goods Sold is made up of$14,250,OOOfor ingredients,packaging, and storage and $3,000,000 for pick/pack
and shipping. Since the product is the same across segments, thecost to produce should be the same. However,
pick/pack and shipping costs were found to vary with whether or notthe order was for a full pallet. Full pallets cost
$75 to pick and ship whereas individual orders cost $2.25 per case.There are 75 cases in a pallet and the segments
, differ in their utilization of full pallets as shown below.,
ABC ANALYSIS OF MERCHANDISING:
t :
Merchandising costs consist mainly of kits costing $500 each.A
review of where the kits were sent indicated that
3,450 kits were sent out and 90 of them were sent to shops.
ABC ANALYSIS OF SELLING, GENERAL AND ADMINISTRATIVE:
Since sales representatives service several products, their costsare allocated to the various products based on gross
sales dollars. GMI gave diaries to 10% of the sales force inrandomly selected markets of the country and asked
! them to track their time in activity classifications for 60 days.The diaries indicated that sales reps spent almost 3
!times as much time on the yogurt than GMI had estimated. The totalallocation to Yogurt jumped from $1,185,000
to $3,900,000. Of their time spent on Yogurt, only 1%of the timewas spent on the shops.
5-9
- - - ---
Category Impulse Segment Yogurt Shops
Total
Sales in cases 1,200,000 300,000 1,500,000
Sales revenue $23,880,000 $5,970,000 $29,850,000
Less: Price Promotions -$ 3.600.000 -$ 900.000 -$ 4.500.000
Net Sales $20,280,000 $5,070,000 $25,350,000
Less: Cost of Goods Sold -$13.800.000 -$3.450.000-$17.250.000
Gross Margin $ 6,480,000 $I,620,000 $ 8,100,000
Less: Merchandising -$ 1,380,000 -$ 345,000 -$ 1,725,000
!Less: SG&A -$ 948.000 - $ 237.000 - $ I.I 85.000
;Net income $ 4,152,000 $1,038,000 $ 5,190,000
ABC ANALYSIS OF COST OF GOODS SOLD:
""
Impulse Segment YOgurtShops 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
Colombo Soft-Serve Frozen Yogurt CaseQuestions
After reading the Colombo Soft-Serve Frozen Yogurt Case Study(SEE BELOW) answer the first six questions below.Please type your answer to the questions below in a Word documentand send in through the designated drop box. Please be sure tofully answer each question. Most questions (with the exception ofquestion 3 and 4) will require at least three to five sentences toanswer.
1. Briefly summarize Colomboâs competitive environment
2. Describe General Millsâ strategy in response to the competitiveenvironment?
3. Finish filling out the numbers on the Profit/Loss statement forColombo Yogurt (attached) using ABC techniques. Be sure and watchthe Colombo Yogurt teaching clip that explains in detail how tobreak down the numbers on the Colombo Yogurt profit and lossstatement using ABC techniques.
4. Using the ABC analysis you completed on the worksheet answer thefollowing questions.
- Which segment has the most sales revenue?
- Which segment has the largest net income?
5. What does the ABC analysis reveal? Be sure and look at whatdrives the cost and be specific.
6. What changes would you suggest to help General Mills? Youranswer should reflect something that you observed by looking at theprofit/loss statement before and after the activityanalysis.
5- 2 Colombo Soft-Serve Frozen Yogurt
In 1994, General Mills Incorporated, a $6 billion consumer goodscompany, acquired Colombo Frozen Yogurt.
General Mills Inc. (GMI) believed they could add Colombo frozenyogurt to their existing product lineup to increase
net sales with little addition in marketing cost.
, Frozen yogurt is sold through two distinct segments - independentshops and impulse locations such as cafeterias,
icolleges, and buffets. Frozen yogurt is the main business for theshops whereas yogurt is incremental to the impulse
locations' main business. GMl's large sales force already servedthe impulse market.
The [mancial results in the first couple of years were mixed.Earnings increased slightly and then dropped each year
even though sales volume was relatively flat. In total,merchandising costs dropped, while pricing promotion rates
escalated. The GMI sales force focused on the impulse segments andpricing promotions were believed to be driving
volume increases. However, volume in the shop segment declined atalarming rates and there was widespread
dissatisfaction in the sales organization. While GMI knew sales bysegment, they didn't track costs by segment.
. Instead costs were allocated based on sales dollars. Thesituation was ripe for a clearer look using ABC methods.
TODAY'S FROZEN YOGURT MARKET STRUCTURE:
When Colombo Yogurt Company began marketing soft-serve frozenyogurt in the early 1980's, their main
distribution was through independent yogurt shops. In the early90's, they faced competition from franchise
operations such as TCBY and Freshens that replaced many of theindependent yogurt shops. And the market
changed as Foodservice operators such as cafeterias, colleges, andbuffets started to add soft-serve yogurt to their
business. By the late 90's, these Impulse locations accounted for2/3 of the soft-serve market.
:In the late 90's, Shop sales began to increase with the additionof distinctive new products such as smoothies,
boosters, and granitas. The Shops make their living from thesoft-serve business and must innovate or go out of
business (as thousands have done in the last decade). On the otherhand, the Impulse locations make their living
from other items and the soft-serve trade is only performancetopspin. These firms are unwilling to take any risk
(new equipment or extra labor) to serve highly differentiatedproducts like smoothies or granitas.
THE GMI-COLOMBO MARKETING PLAN:
The GMI Foodservice Division markets brands such as Cheerios,Yoplait, Betty Crocker, Gold Medal Flour,
Hamburger Helper, Pop-Secret, and Chex Snack to Food ManagementFirms, Hospitals, and schools. Colombo
yogurt was added to this product lineup and the Foodservice salesforce covered both Shop and Impulse locations.
Salesforce: Colombo's salesforce was merged into the Foodservicesalesforce. Customers were reassigned to
salespeople who already serviced that geographical area. Thesalespeople varied in their reaction to the product.
Some found shops easy to sell to while others avoided the shopsdespite the possible lost commission. Many spent a
lot of time helping their impulse customers understand how to usethe machinery.
. Merchandising Promotions: Colombo traditionally charged the Shopsfor merchandising that was large scale and
; eye popping (neon signs). The Shops used these signs to drawcustomers inside. GMI chose not to charge for
merchandising and to provide the same large scale merchandising toboth Shops and Impulse locations. Shops were
very interested in the kits while many Impulse locations didn'teven hang them up.
Pricing Promotions: Pricing promotions are a mainstay ofGMI'simpulse location approach. GMI's salesforce
generally used these promotion events as an opportunity to visittheir accounts and take advantage of the occasion to
meet service needs and sell other products that may not befeatured.
5-8
Chapter 05 - Activity-Based Costing and Customer ProfitabilityAnalysis
r"' GMI made price promotions available to both segments of themarket. While the deals were typically around $5 per
case, they averaged $3 per case against all the volume shippedduring the year. GMI marketing knew price was not a
major decision factor for Shops and they did not target pricingpromotions to them. However, Shops were aware of
the promotions and took advantage of them.
THE BUSINESS STATUS - PRE-ABC:
PROFIT AND LOSS BY SEGMENT - PRE-ABC
Cost of Goods Sold is made up of$14,250,OOOfor ingredients,packaging, and storage and $3,000,000 for pick/pack
and shipping. Since the product is the same across segments, thecost to produce should be the same. However,
pick/pack and shipping costs were found to vary with whether or notthe order was for a full pallet. Full pallets cost
$75 to pick and ship whereas individual orders cost $2.25 per case.There are 75 cases in a pallet and the segments
, differ in their utilization of full pallets as shown below.,
ABC ANALYSIS OF MERCHANDISING:
t :
Merchandising costs consist mainly of kits costing $500 each.A
review of where the kits were sent indicated that
3,450 kits were sent out and 90 of them were sent to shops.
ABC ANALYSIS OF SELLING, GENERAL AND ADMINISTRATIVE:
Since sales representatives service several products, their costsare allocated to the various products based on gross
sales dollars. GMI gave diaries to 10% of the sales force inrandomly selected markets of the country and asked
! them to track their time in activity classifications for 60 days.The diaries indicated that sales reps spent almost 3
!times as much time on the yogurt than GMI had estimated. The totalallocation to Yogurt jumped from $1,185,000
to $3,900,000. Of their time spent on Yogurt, only 1%of the timewas spent on the shops.
5-9
- - - ---
Category Impulse Segment Yogurt Shops
Total
Sales in cases 1,200,000 300,000 1,500,000
Sales revenue $23,880,000 $5,970,000 $29,850,000
Less: Price Promotions -$ 3.600.000 -$ 900.000 -$ 4.500.000
Net Sales $20,280,000 $5,070,000 $25,350,000
Less: Cost of Goods Sold -$13.800.000 -$3.450.000-$17.250.000
Gross Margin $ 6,480,000 $I,620,000 $ 8,100,000
Less: Merchandising -$ 1,380,000 -$ 345,000 -$ 1,725,000
!Less: SG&A -$ 948.000 - $ 237.000 - $ I.I 85.000
;Net income $ 4,152,000 $1,038,000 $ 5,190,000
ABC ANALYSIS OF COST OF GOODS SOLD:
""
Impulse Segment YOgurtShops 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
