Chiffon Case

Chiffon Project

In the case we are given 3 different ways of analyzing the capital investments of the company. They are Incremental basis; facilities used basis, and fully allocated basis. Incremental basis is given as the original way General Foods analyzed the Chiffon Project. This took into account only the incremental revenue and the investment revenue, which I believe to be a problem when deciding on whether to take the case or not. The analyzation of the project needs to take into account the building usage and whether this building usage would be better suited for another project. Another thing that was they did not take into account getting rid of Jell-O.

Facilities Used Basis was the next way that General Foods used to try and decide whether to take on the project. If the Chiffon project were taken on they would be using half of an existing agglomerator and two-thirds of a building. Jell-O was using these before so they must take into account the difference from dropping Jell-o and picking up Chiffon. This is a strong indicator of whether a project should be taken on because if there is not sufficient facility space for a project then it should not be accepted and current manufacturing should stay in place. After calculating the ROFE for the project it fell to 34%.

The 3rd alternative was using a fully allocated Basis. This takes into account not total overhead costs but just overhead costs that increase due to the addition of the Chiffon project. After analyzing the addition of the Chiffon case it requires new production technology that General Foods does not currently have. This is something that would have been needed over time regardless of the Chiffon project but is being attributed to the Chiffon project because of the time when it is being decided to be taken or not. In each of these three ways of analyzing the capital investment of Chiffon the ROFE changes based on how and what you decided to compare it to. This is why all three must be...