The Super Project

Super Project

Contents

Introduction & Problem Statement 3

Analysis 3

Conclusions 5

Appendix 1. Incremental basis method 6

Appendix 2 Facilities-used basis method 7

Appendix 3 Fully allocated basis method 8

Appendix 4 9

Appendix 5 10

Introduction & Problem Statement

General Foods Corporation is a food producer that is operating in desserts market. Company now is evaluating the Super project: launch of a new product “Super” (powder based instant dessert) into the market. Success of new product is estimated by powder dessert market growth, new project will probably cannibalize on some of the market share of older company products (Jell O).

All the projects in this company are evaluated according to investment manual that divides all investment projects into 4 categories. Super project falls under projects that increase profit category (projects designed to provide facilities to manufacture and distribute a new product or product line). The new product is estimated to have potential to increase General Food’s sales and earning power for many years in the future. Main criteria of accepting project are Payback time and ROFE – return on funds employed. However while evaluating this project, company has faced difficulties in evaluating its future profitability and taking a decision to approve it or not.

Analysis

The Super project currently requires 200k$ of new investment of capital: 80k$ for building modifications and 120k$ for machinery and equipment. In addition, as company now does not produce at maximum capacity – some of the unused capacity will be shifted to producing Super dessert. Same main manufacturing machines will be used as is used to produce other products therefore 200k$ investment is required only for packaging.

While discussing the evaluation of the project, managers of the company cleared these key points:

• Both long and short term view must be applied when evaluating the project – what seems to be a good...