Question

Colombo Soft-Serve Frozen Yogurt Case Questions
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 document and send in through the designated drop box. Please be sure to fully answer each question. Most questions (with the exception of question 3 and 4) will require at least three to five sentences to answer.
1. Briefly summarize Colombo’s competitive environment
2. Describe General Mills’ strategy in response to the competitive environment?
3. Finish filling out the numbers on the Profit/Loss statement for Colombo Yogurt (attached) using ABC techniques. Be sure and watch the Colombo Yogurt teaching clip that explains in detail how to break down the numbers on the Colombo Yogurt profit and loss statement using ABC techniques.
4. Using the ABC analysis you completed on the worksheet answer the following 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 what drives the cost and be specific.
6. What changes would you suggest to help General Mills? Your answer should reflect something that you observed by looking at the profit/loss statement before and after the activity analysis.

5- 2 Colombo Soft-Serve Frozen Yogurt
In 1994, General Mills Incorporated, a $6 billion consumer goods company, acquired Colombo Frozen Yogurt.
General Mills Inc. (GMI) believed they could add Colombo frozen yogurt to their existing product lineup to increase
net sales with little addition in marketing cost.
, Frozen yogurt is sold through two distinct segments - independent shops and impulse locations such as cafeterias,
icolleges, and buffets. Frozen yogurt is the main business for the shops whereas yogurt is incremental to the impulse
locations' main business. GMl's large sales force already served the 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 and pricing promotions were believed to be driving
volume increases. However, volume in the shop segment declined at alarming rates and there was widespread
dissatisfaction in the sales organization. While GMI knew sales by segment, they didn't track costs by segment.
. Instead costs were allocated based on sales dollars. The situation was ripe for a clearer look using ABC methods.

TODAY'S FROZEN YOGURT MARKET STRUCTURE:
When Colombo Yogurt Company began marketing soft-serve frozen yogurt in the early 1980's, their main
distribution was through independent yogurt shops. In the early 90's, they faced competition from franchise
operations such as TCBY and Freshens that replaced many of the independent yogurt shops. And the market
changed as Foodservice operators such as cafeterias, colleges, and buffets started to add soft-serve yogurt to their
business. By the late 90's, these Impulse locations accounted for 2/3 of the soft-serve market.
:In the late 90's, Shop sales began to increase with the addition of distinctive new products such as smoothies,
boosters, and granitas. The Shops make their living from the soft-serve business and must innovate or go out of
business (as thousands have done in the last decade). On the other hand, the Impulse locations make their living
from other items and the soft-serve trade is only performance topspin. These firms are unwilling to take any risk
(new equipment or extra labor) to serve highly differentiated products 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 Management Firms, Hospitals, and schools. Colombo
yogurt was added to this product lineup and the Foodservice sales force covered both Shop and Impulse locations.
Salesforce: Colombo's salesforce was merged into the Foodservice salesforce. Customers were reassigned to
salespeople who already serviced that geographical area. The salespeople varied in their reaction to the product.
Some found shops easy to sell to while others avoided the shops despite the possible lost commission. Many spent a
lot of time helping their impulse customers understand how to use the machinery.
. Merchandising Promotions: Colombo traditionally charged the Shops for merchandising that was large scale and
; eye popping (neon signs). The Shops used these signs to draw customers inside. GMI chose not to charge for
merchandising and to provide the same large scale merchandising to both Shops and Impulse locations. Shops were
very interested in the kits while many Impulse locations didn't even hang them up.
Pricing Promotions: Pricing promotions are a mainstay ofGMI's impulse location approach. GMI's salesforce
generally used these promotion events as an opportunity to visit their accounts and take advantage of the occasion to
meet service needs and sell other products that may not be featured.
5-8
Chapter 05 - Activity-Based Costing and Customer Profitability Analysis
r"' GMI made price promotions available to both segments of the market. While the deals were typically around $5 per
case, they averaged $3 per case against all the volume shipped during the year. GMI marketing knew price was not a
major decision factor for Shops and they did not target pricing promotions 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, the cost to produce should be the same. However,
pick/pack and shipping costs were found to vary with whether or not the 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 costs are allocated to the various products based on gross
sales dollars. GMI gave diaries to 10% of the sales force in randomly 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 total allocation to Yogurt jumped from $1,185,000
to $3,900,000. Of their time spent on Yogurt, only 1%of the time was 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

Answer 1

Ans 1

General Mills acquired Colombo Frozen Yogurt to increase net sales with little additional marketing cost. Frozen yogurt is sold through independent shops and impulse locations. The GMI sales force focused on the impulse segments and its price promotion lifted its sales volume.

Basically General Mills acquired Colombo Frozen Yogurt in order to increase its by making an addition to their existing product line net sales with little addition to its marketing cost.

There was basically two distribution channel operated by Colombo, Independent shops and Impulse location such as Cafetarias, Collages and Buffet.

Independent Shops, In the early 90’s due to the emergence of franchise operations such as TCBY and Freshens. Independent shops faced severe competition and they were put out of Business. This was really alarming for GMI as their sales would decline considerably if their independent shops could not survive the intense competition. In the late 90’s in order to survive competition, shops needed product innovation and thereby added new distinctive product such as smoothies, boosters, and granitas. Their sales began to increase and they started making living from the soft serve business.

Impulse locations: Since the market changed, as Foodservice operators added soft-serve yogurt to business in the early 90’s. By the late 90’s, impulse locations captured 2/3 of the soft-serve market, which made impulse locations a very vital sales segment for GMI. Since the Impulse Location were already dealing in other products beside yogurt, the soft-serve trade was only performance topspin for impulse locations, they are unwilling to take any risks on new product innovation. As a result, potential sales from impulse locations are limited; although, they are the main distribution segment for GMI.

Ans 2

The following strategies were adopted by GMI in response to the competitive environment

- Colombo sales force was merged with the Foodservice sales force which serviced both Shops and Impulse locations. Customers were reassigned to salespeople. The reaction of the salespeople to products was varied. And many salespeople spent a lot of time helping customers understand how to use the machinery.

- GMI provided the same large scale merchandising to both Shops and Impulse locations and didn’t charge for it. However, many impulse locations didn’t use the kits.

- GMI made Price Promotion available to both the segments of the market. Although GMI did not target shop for Pricing Promotion, but they did take advantage of the same

Ans 3

ABC Analysis

Particulars	Impulse Segment	Independent Yogurt shops	Total
Sales in Cases	1200,000	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 :
Ingredient/packaging/storage	11,400,000	2,850,000	14,250,000
Shipping	2,625,000	375,000	3,000,000
Gross Margin	6,255,000	1,845,000	8,100,000
Merchandizing	1,680,000	45,000	1,725,000
Selling, General and Administrative	3,861,000	39,000	3,900,000
Net Income	714,000	1,76,1000	2,475,000
Net Income per case	$ 0.60	$ 5.87	$ 1.65

Explanation :

Analysis of Cost

Cost of Goods Sold - Ingredient/packaging/storage

Cost Driver Rate = Total Cost / Total No. of Cases

                               = $ 14250000 / 1500000

                               = $ 9.5 per case

Cost Allocation

Impulse = Cases sold * cost per case as calculated above

                = 1200000 * 9.5

                = 11400000

Similarly for Shops = 300000 * 9.5 = 2850000

Shipping :

Impulse

Pallet cost = 60000 /75 cases = 800 pallets at $ 75 = $ 60000

Individual Cases = 1,140,000 cases at $2.25 = $2,565,000

Total = $ 2,625,000

Shops

Pallet cost = 240,000 / 75 cases = 3,200 pallets at $75 = $240,000

Individual cases = 60,000 cases at $2.25 = $135,000

Total: $375,000

Merchandising: $500 per kit

Impulse: (3,450 – 90 kits) * $500 = 3,360 * $500 = $1,680,000

Shops: 90 kits * $500 = $45,000

Sales General and Administrative:

$1,185,000 previously allocated based on sales dollars. After sales diaries analysis, total was adjusted to $3,900,000.

Impulse: 99% * $3,900,000 = $3,861,000

Shops: 1%* ´$500 = $39,000

Ans 4

As per ABC Analysis

a)      Impulse segment has the most sales revenue

b)      Independent Yogurt Segment has the largest net income

Ans 5

ABC analysis identifies different cost driver and allocation is done on the basis of cost driver. In the above case for example entire cost of goods sold were allocated on the basis of sales driver. Although these involves different activities, the cost driver of which is different. As for activities involving ingredient, Packaging, storage the cost driver should be number of cases sold by each segment as their production cost is same. And with respect to Pick/Pack and shipping cost it is on the basis of cost of Pallet and cost of individual cases.

With respect to Sales General and Administrative cost which was previously allocated as $ 1,185,000 on the Sales Dollar basis. Later an analysis revealed that these cost is actually $ 39,00,000. Of which 99% is to be allocated to Impulse Segment and only 1% to Shop on the basis of time spent. Which literally change the dynamic as one of the major cost driver. As net income of Impulse falls to $ 7,14,000 under ABC Analysis making it as a less profitable segment as compared to yogurt shop segment.