5-2 Colombo Soft-Serve Frozen Yogurt

Determining accurate costs information and real product profitability is always critical in different organizations; it can not only help companies understand their competitive edges but also help them develop appropriate strategic plans to minimize weaknesses and avoid threats. Activity-based costing is one of widely used costing approaches across many business industries today. It is a method of identifying all activities that actually performed in a firm and assigning each resource cost of activity to all products and services. In the case of Colombo frozen yogurt, we apply the activity-based costing analysis to illustrate how market costs allocated to two different channels of distribution and analyze its marketing structures and plans.

After General Mills Incorporated invested $6 billion to acquire Colombo Frozen Yogurt to help expand its existing product lineup and increase the current sales revenue, the company actually faced challenges of intense competition in its independent shops as well as limited growth in impulse locations. The independent shops not only faced competition from franchise operations such as TCBY and Freshens in the early 1990s but had to innovate in order to maintain the business. In addition, the market segment had changed as independent shops tended to be widely replaced by impulse locations, including cafeterias, college, and buffet. However, the sales growth in impulse locations is actually limited due to the reason that these foodservice operators dont want to take any risk in investing new equipment and extra labor. The GMI-Colombo continued to put its main focus on impulse locations while ignoring shops and used same approach to two distinct segments. The salesforce and merchandising promotion were inefficient and ineffective as well. The company lacked of experience in operating independent shops and

failed to gather detailed information about two separated channels.

By using activity-based costing method, it indicates that the profit and loss statement has a huge difference compared to the one in traditional costing system. First, we separate the pick/pack and shipping costs from total cost of goods sold while the cost to produce is still the same for both segments ($1,425,000/1,500,000=$9.50 per case. Impulse: 1,200,000 @ $9.50=$11,400,000. Shop: 300,000 @ $9.50=$2,850,000). The pick/pack and shipping costs actually vary with whether or not the order was for a full pallet. As impulse segment has ordered more individual case than full pallets, yogurt shops do the opposite (Impulse: full pallets= 60,000/75 = 800 @ $75 = $60, 000; individual cases = 1,140,000 @ $2.25 = $2,565,000; total= $2,625,000. Shop: full pallets= 240,000/75 = 3200 @ $75 = $240, 000; individual cases= 60,000 @ $2.25 = $135, 000; total=$375,000). Second, the ABC analysis also shows that 97 percent of total merchandising costs come from impulse segment, but the problem is that they dont really use the kits at all (Impulse: (3450-90) @ $500=$1,680,000. Shops: 90 @ $500=$45,000). It implies the majority of this cost is an unnecessary waste. Third, 99 percent of the time was consumed by impulse segment and only 1 percent was spent in the shops (Impulse: 99% @ $3,900,000 = $3,861,000. Shops: 1% @ $3,900,000 = $39,000). Sales representatives spent three times as much time on impulse customers than GMI had estimated, and the result clearly demonstrates how inefficient the company and its salesforce were. Besides, the new net income in ABC analysis is now 714,000 for impulse segment and 1,761,000 for yogurt shops, and we can notice that impulse segment generates almost 80 percent of total sales while only contributes 28.8 percent of total profit ($714,000/$2,475,000 = 28.8%).

According to ABC analysis, it points out SG&A cost is the biggest issue among all others beside cost of good sold. Instead of $948,000 for impulse and $237,000 for shops in volume-based costing analysis, it shows $3,861,000 and $39,000 in activity-based analysis. Thats a huge gap between these two different methods. We suggest the company should try to reduce the SG&A cost of impulse locations. For instance, all sales representatives should build a close relationship with shops customers and be more proficient and efficient in all its business operations by joining a training plan or sales workshop. Besides, the shipping cost is the second-largest expense, which is counted under cost of goods sold in volume-based analysis. The company should ask for discounts for larger orders in order to lower the overall shipping costs. The need of yogurt shops and impulse segments is quite different, yet GMI still provided free and largescale merchandising to impulse locations which they didnt really need it. It wastes useful resources in the wrong place, but whats more it puts a huge additional burden on its merchandising costs. Therefore, offering marketing kits only by request and charging them for these kits will be other ways to cut the merchandising costs. The company should also pay much attention on shops customers and aim to increase the sales from yogurt shops which merely consist of 20% of total sales revenues.