A CASE STUDY ON COMPAGNIE DU FROID, S.

Table of Contents/List of Exhibit Table of Contents Execeutive Summary Main Report List of Exhibit Bibliography i ii iii vi vii

Executive Summary Compagnie du Froid S.A is an Ice cream manufacturing company founded by Jacques Trumans father in 1985, the company is a major competitor in the summer ice cream business. It currently has presence in the French, Italian and Spanish regions, each region is managed by a competent manger with the mandate to make business decisions on behalf of the main office. Each regions performance was judged based on the budget provided by the respective regional heads, this budgets was based on an average temperature rate for the summer. The sales objective was predominantly dependent on the budgeted summer temperature, other prevailing conditions also affected sales. A few of the regional managers were aware of some of the other conditions and it was factored into the initial budget submitted to the central office thus reducing the impact on the sales outcome. Other managers who failed to indentify such conditions that would impact on its overall output paid the price in terms of increase in wages and production inefficiency. In summarizing Jacques should discard the current 2% corporate profits to each regional manager, each regional head should be given a percentage of the profits made by its region and not by the company. In doing this Jacques Trumen will ensure that; 1. Regional heads submit to the central office budgets that are realistic and have taken into considerations conditions as well as provided for incidentals that could affect sales for the financial year. 2. Regional heads design more products and improve on distribution lines by looking for newer markets to boost sales. This push would be as a result of a percentage of corporate profits to regional managers at the end of the financial year. 3. Regional heads are forced to drive the business more productively and reduce wastage in their respective regions. 4. Shareholders like him would be able to get the required level of returns from their investment.

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Background Compagnie du Froid, S.A is an ice cream company founded in 1985 by Jacques Trumens father in France. In 2009 Jacques took over the business and expanded the business into Italy and Spain, but his attention was mainly devoted to the creation of new businesses. The company believed in decentralized decision making amongst its regions while the central office was responsible for financing and accounting as well as development of new products in ice-creams and specialties. Jacques maintained control over the regions through a profit planning system, each regional manager would submit their profit plan by Nov/Dec prior to the commencement of a new fiscal year. Using the plan, Jacques would discuss and supervise the expansion strategy for each region with a view of ensuring that enough cash is generated to support the companys new business ventures. He ensured that profit statements were generated by the regions every two weeks for review so as to help detect problems early when targets were falling below budget. Compagnie introduced its first specialty product in 2005, the sophisticated ice cream flavors was a strategy to emphasize higher margins and less intense competition as against the regular ice cream. The strategy became operational through the profit plan where goals for percentage of sales for specialties were set by Jacques. His belief was that the business should compensate shareholders for the risk of tying up capital in the business, he expected a reasonable level on shareholders investment.

Analysis Exhibit 1 shows the flexed budget of Compagnie du Froids Italian region as against the actual budget for its 2009 result. Three key issues come into the forefront; y The Italian region was able to surpass budgeted volume for Ice cream sales as at the end of 2009 by 1.1%. One of the contributory factors to this achievement is the weather condition which has been favorable as earlier budgeted in Exhibit 6 (Temperature and sales volume Italy) of the case study. It was assumed that with a favorable weather condition of 29.7 Celsius, sales volume should peak at 2,725 litres. Based on actual readings at 29.8 Celsius, sales volume grew to 2,756 litres resulting in a 31litres excess above budgeted value of 2,725litres.

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The region achieved budgeted amount in sales without necessarily increasing its prices on ice cream and specialties. The budgeted amount on ice cream and specialties based on Exhibit 3 (of the case study) are euro 4.47 and euro 8.2 against total sales value (Ice Cream & Specialties) of euro 13,199. The region achieved total sales value euro 13,359 using the budget price, this achievement could be as a result of the expansion of the distribution chain into the Italian west coast. The change in labor, fixed cost and raw materials affected the efficiency and the wages paid as against the budget. The decrease in efficiency was as a result of the old machines brought from France for production.

The Italian region manager did exceptionally well despite challenges faced by the region in manufacturing its products. He attained his sales goals as per budget as well as the expansion of his distribution network of the companys product to the western Italian coast. He factored into his budget labor wages and low efficiency of production as a result of the old machines, by doing this he was able to achieve a realistic sales objective a lot easier. In comparing the Spanish and the French regions based on the available information, the Spanish leaders performance was better because he was more innovative in developing products relating to the core business of the company which other regions planned to adopt. His cost of goods sold was very favorable, also in the face of not been able to meet demand he thought up the idea of importing products from the French division to be able to be in business. His region also borne the expenses of his people installing equipments moved from his region to the French production line. He was also forced into a price cut to stay competitive with his competitors because of the unfavorable weather condition whilst keeping advertisement up to gain the market share. The French managers profit increased by 20% over the previous years but market share in the traditional regions dropped while he made inroads into the west coast. While expanding he was losing his market share in regions he had very good strongholds.

Based on Exhibit 5 of the main case and since the ice cream is only produced by the company, a cost based transfer price approach was adopted by the French region. The cost based approach implies that the ice creams were transferred between the two regions at the cost of production with a reasonable mark-up price. The French region could have made more money if it had sold the 603 litres in the open market at the rate the 3,575 litres were sold but the decision taken was in the best interest of organization.

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This approach of transfer pricing is at the; y y y Autonomy of the two regional heads. In the interest of the organization. Easy to implement

In conclusion it can be seen that the current performance compensation is not the best evaluation for the regional heads, the regional managers know that the 2% performance bonus will be paid despite the respective result in the regions. It is imperative that the CEOs performance bonus be based on the achievement of 80% of set goals identified with each regional manager at the beginning of the year. In so doing regional managers will be more creative in finding new markets as well as creating new products to generate revenue for their respective regions.

Exhibit 1

CAMPAGNIE DU FROID S.A

Sales Output Ice Cream Sales Output Specialities Total Sales Output Budget lit/gr/hrs Flexed lit/gr/hrs Actual 2453 2480 2480 276 276 272 2725 2756 2756

Sales Revenue Ice Cream Sales Revenue Specialities Total Sales Revenue

10,967 2232 13,199

11088 2265 13353

11106 2253 13359

Cost Dairy Materials 5652 Other Ingredients Ice Cream 1885 Other Ingredients Specialities 425 Labour hours Ice Cream Labour hours Specialities Fixed Overhead Operating Profit 300 220 4258 459

2123litres 1275gr 196gr 33.1hrs 24.24hrs

5735 1906 431 304 223 4258 495

2154 1289 199 33.6 24.60

5662 1932 430 328 212 4278 517

FLEXED BUDGET FOR ITALIAN REGION

Header Bibliography Eddie McLaney & Peter Atrill (2008) Accounting An Introduction. 4th edition Pearson Education Limited. Robert Simons & Antonio Davila (Rev: Feb 11, 2010) Compagnie du Froid, S.A. Harvard Business Review.

http://classes.bus.oregonstate.edu/winter06/ba321/Caplan/Management%20Accounting%20Chapter%2023.htm {viewed 3rd June 2010} http://www.spireframe.com/docs/financial_ratio_accounts_receivable_turnover _t001_c4.aspx {viewed 2nd June 2010}

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