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Economic Feasibility Analysis

Economic Feasibility Analysis

Economic Feasibility Analysis

Economic feasibility analysis: Perform an economic costbenefit analysis of whether PFVC should launch Chicken Sensations. Clearly state your decision and conclusion from your analysis. (You can use an Excel spreadsheet to complete these tasks in an organized, neat appendix to your case analysis. A reader of your case should be able to follow your work and computations. The results of your appendix analyses can be referenced in the body of your case to support your decision.)

THE CHALLENGE

Parson Foods Vegetable Company (PFVC) is a newly

created, wholly owned subsidiary of Parson Foods, one of the

oldest and largest fluid milk processors in the United States.

Parson was founded in 1925 and grew through a series of

acquisitions, first in milk processing and later in frozen and

canned vegetables.

Parson’s operating strategy was to provide capital and

management expertise to acquired entities while giving local

management significant decision-making autonomy. This

strategy worked well with fluid milk processors who tended

to compete in local or regional areas. As Parson moved into

frozen and canned vegetables, it increasingly found that

these firms were competing nationally. Multiple vegetable

companies under the Parson Food umbrella were competing

for the same business, often undercutting one another on

price to “win” business. These activities threatened financial

performance, resulting in lower profits and even losses in

many of these vegetable companies.

Parson’s management decided that a strategic change

was needed to return its vegetable companies to profitability.

This resulted in the creation of PFVC where all the

vegetable companies were consolidated. Richard Lawson

was named CEO of the new company. His charge was to

improve the lagging performance in the vegetable group.

Changes were expected and fast. Richard and his new

executive team were feeling the pressure to find a way to

“turn this thing around.”

THE OPPORTUNITY

Richard knew he and his team faced many challenges. In recent

months, they had been working on operational and structural

changes designed to reduce administrative and selling costs. He

also realized that continuing the turnaround requires the firm to

improve sales of continuing and new products.

Several months ago, Carlos Rico, the company’s

marketing manager, approached Richard with an idea for a

revolutionary nutritious convenience frozen food product.

The new product, Chicken Sensations—consisting of

frozen vegetables, spaetzels (a coated seasoned pasta),

and chicken—would compete against frozen pizza and

microwaveable dinners. Based on initial projections, Chicken

Sensations had the potential to be a homerun with company

sales, expected to increase by 20% and with gross margins

double current vegetable offerings.

While the potential for Chicken Sensations was

palpable, Richard was a realist given PFVC’s history of new

product introduction. The most recent, Soup-in-a-Flash—a

microwaveable soup starter kit—failed miserably with the

company writing off $10 million in unsold finished goods.

As a result, corporate executives were not enthusiastic about

investing in another PFVC new product launch. Richard

mused, “If Chicken Sensations fails, my tenure as CEO may

be short-lived.”

I M A E D U C AT I O N A L C A S E J O U R N A L V O L . 1 0 , N O . 2 , A R T. 3 , J U N E 2 0 1 71

ISSN 1940-204X

The Chicken or The Egg: Hatching a New and Innovative Product

© 2 0 1 7 I M A

Robert Rankin

Texas A&M Commerce

Martin Stuebs

Baylor University

 

 

THE TEAM

Richard decided to assemble a cross-functional team of

PFVC’s best sales, production, and financial professionals to

evaluate the feasibility of Chicken Sensations. Along with

Carlos, team members included Gary Smits, the production

manager, and Vicki Hoerning, the chief financial analyst. At

the team’s first meeting Richard began: “Congratulations and

welcome. You have been selected to evaluate the feasibility

of a new product, Chicken Sensations. This product has the

potential to create a new category of convenience frozen

foods and to dramatically increase company profits. Our

challenge is to objectively evaluate the potential of this

product idea. Introducing a product and having it fail is not

an option. Carlos had the idea for this product, so I will let

him explain.”

Carlos stood up and moved to the front of the

conference room. “Thanks, Richard. Good afternoon. As

many of you are aware, we currently produce Pasta Done,

a microwaveable product consisting of frozen vegetables

and spaetzels. This new product idea takes that concept

one step further. We are going to add protein, in this case

chicken, into the microwaveable bag with the vegetables

and spaetzels. Competing products separate chicken, frozen

vegetables, and a sauce in multiple pouches. Combining

all of the ingredients enhances convenience and simplifies

the cooking process for consumers. They simply empty the

contents into a bowl, add a tablespoon of water, microwave

for six minutes, and voila! Dinner is ready.

“That delicious aroma you smell coming from the test

kitchen is a sample of Chicken Sensations. Let’s eat!”

While the team was sampling the product, Richard

continued, “Thanks, Carlos. I think this could be a winner,

but we need to make certain it is financially feasible. If we

launch Chicken Sensations, we need to produce a price-

competitive, high-quality product that delivers a profit

superior to our current offerings. We know that a significant

challenge to launching Chicken Sensations is getting USDA

approval to handle meat in our processing facility. We have

limited institutional knowledge of the process, because it

was 30 years ago when we last applied for USDA approval.

We also need to consider how our competitors will react to

the new product and document market issues related to

product costs and distribution. At our next meeting, I want

to review your initial findings on the financial feasibility of

Chicken Sensations.

“Carlos, I would like for you to evaluate the selling prices

of current convenience frozen food products; propose a

selling price; recommend the mix of chicken, spaetzels, and

vegetables; forecast first-year sales; and quantify incremental

sales and marketing costs.

“Gary, I would like you to estimate the costs associated

with retrofitting (preparing) your facility for USDA approval

and estimate product costs.

“Vicki, would you work with Carlos and Gary to generate

a financial feasibility analysis? You will probably need to

perform analyses to evaluate the expected overall first-year

profitability, breakeven sales level, and margin of safety.

‘What-if’ analyses can assess the impact of sales forecast

errors and changes in the sales price, product costs, and

quantity inputs. With our recent history of new product

introduction, our goal is to far exceed breakeven in the first

year. Anything less would not be acceptable to Parson’s

corporate executives.”

Vicki commented, “Richard you can count on me. I think

I speak for the entire team when I say we are excited to be

part of the team and will do everything possible to ensure

the success of Chicken Sensations.”

Addressing the entire team, Richard reiterated, “I do

not think I need to remind you of the importance of this

project. Because of the failure of Soup-in-a-Flash and limited

financial resources, corporate executives will be reluctant to

authorize the launch of any new products. We need to ensure

our analysis is rock-solid before requesting any funds.”

TWO WEEKS LATER

“Good afternoon gentlemen,” Vicki began addressing Carlos

and Gary. “I know you have been busy with your Chicken

Sensations assignments. My goal today is to discuss the

information you have gathered so that we can put together

the initial feasibility analysis that Richard wants. I will record

and summarize the information you provide. Carlos, what

did you determine about pricing and other expected costs

associated to launch Chicken Sensations?”

“First, I looked at comparable frozen convenience food

products with package sizes ranging from 20 to 30 ounces,

the retail price per ounce is from $0.16 to $0.20—or $3.20

to $6.00 per package. Since I expect consumers to assign a

higher nutritional value on Chicken Sensations than other

products, I suggest we target a retail sales price of $0.1875

per ounce or $3.75 per bag for a 20-ounce bag. With retailers

I M A E D U C AT I O N A L C A S E J O U R N A L V O L . 1 0 , N O . 2 , A R T. 3 , J U N E 2 0 1 72

 

 

requiring a minimum 20% gross margin for new products, I

recommend that our selling price to them be $3 per bag or

$36 per case of 12.”

Carlos further explained some of the sales expenses

and other expected costs, “To encourage consumer trial of

Chicken Sensations, we will have to offer coupons of $0.20

per bag or $2.40 per case for all cases sold in the first year. To

gain access to convenience frozen food distribution channels,

we will have to pay a brokerage commission of 6% of our

sales price. In addition, retailers (in total) require a one-time

slotting allowance of $6 million to purchase shelf space.”

Vicki noted that the slotting allowance costs would need to

be expensed in the first year.

Continuing, Carlos explained estimates for other costs:

“Package design costs for artwork and photography expected

to be $2 million will have to be paid in the first year. To

support Chicken Sensations, we will need to hire additional

salespeople at total annual cost of $400,000. I anticipate we

will sell 65,000 cases in the first month with sales increases of

15,000 cases per month for the first year when we will reach a

maximum of 230,000 cases per month.”

“Great. Before we discuss the production and cost

assumptions, Gary do you have any questions for Carlos?”

Vicki asked.

“Thanks for asking. I do have a few questions. Based on

your comments, it looks like our case configuration would

be 12, 20-ounce bags or a 15-pound case. Is that correct,

Carlos?” Gary questioned.

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