The Chicken Or The Egg: Hatching A New And Innovative Product

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.”

IMA EDUCATIONAL CASE JOURNAL VOL. 10 , NO. 2 , ART. 3 , JUNE 20171

ISSN 1940-204X

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

©2017 IMA

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

IMA EDUCATIONAL CASE JOURNAL VOL. 10 , NO. 2 , ART. 3 , JUNE 20172

 

 

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.

“Yes, I feel a 20-ounce bag allows for us to be competitive

on a price per ounce with other convenience frozen food

products,” Carlos clarified.

“That package size works great. We anticipate producing

Chicken Sensations at the Oakdale facility where we already

make spaetzels and have the capability and capacity to

package 20-ounce bags. Are you comfortable with your sales

forecast? As I recall, the sales forecast for Soup-in-a-Flash

was overly optimistic, causing us to over-produce a product

that never sold.” Gary said.

“Yes, I am confident, Gary,” Carlos replied tersely, “I

am not certain if you are aware that prior to joining PFVC,

I successfully introduced several new frozen pizza products

at another company. The forecast I provided is consistent

with first-year sales volumes for those new products. In my

experience, for new product introductions, sales forecast

errors are generally incorrect by 25%, so I would plan for

sales to range from 75% to 125% of my forecast.”

“Awesome, one more question,” Gary interjected.

“Carlos, what are consumers’ expectations about the amount

of protein to be included?”

“For frozen pizza, consumers expect no less than 10%

protein content. If the protein content (e.g., chicken, beef,

pork) exceeds 20%, consumers are unwilling to pay the

increased price for the product. Since we want consumers

to have an initial positive impression of our product, I

recommend we include 20% chicken, 65% vegetables, and

15% spaetzels for Chicken Sensations.”

“Thanks, Carlos. That works great. If anything, I

presume once we have consumer acceptance of Chicken

Sensations we might substitute vegetables at $0.50 per

pound or spaetzels at $0.15 per pound for chicken at $2.00

per pound to increase our profits,” Gary finished.

“Carlos, thanks for addressing Gary’s concerns. Now let’s

discuss the production and cost inputs,” Vicki commented.

“Sure, Vicki. Based on the case configuration of 12,

20-ounce bags, packaging cost will be $0.20 per bag for

shipping to retailers. Each cardboard shipping box has a cost

of $0.30 per box. At our processing facility, direct labor and

variable manufacturing overhead costs per pound are $0.30

and $0.40, respectively. To retrofit the facility for USDA

compliance, I anticipate spending an additional $2 million,

which we will depreciate over five years with no salvage

value,” Gary summarized.

“I have everything I need from you,” Vicki commented.

The data Vicki gathered from Carlos and Gary are presented

in Table 1. “I should be able to prepare the preliminary

financial feasibility analysis within the next few days. When

we meet with Richard, I am confident he will want to discuss

the impact of your assumptions on the financial feasibility of

Chicken Sensations. When we are done with our meeting with

Richard next week, I anticipate he will request a meeting with

Parson’s corporate executives to review our plans and request

permission to launch Chicken Sensations. I am excited about

the potential for Chicken Sensations. It’s nutritious and tastes

good, too. Thanks, again. See you soon.”

IMA EDUCATIONAL CASE JOURNAL VOL. 10 , NO. 2 , ART. 3 , JUNE 20173

 

 

IMA EDUCATIONAL CASE JOURNAL VOL. 10 , NO. 2 , ART. 3 , JUNE 20174

Pounds per Case 15 Expected pounds per case Bags per Case 12 Expected number of bags per case

Cases Sold Annual Sales

Cases First Month Sales Volume 65,000 Initial sales forecast for the first month Monthly Sales Growth Year 1 15,000 Sales growth per month for the first year Months per year in Year 1 12 Number of months in a year Sales Forecast Error Percent 25% Percent possible sales forecast error December Sales Volume First Year Sales Volume Annual Sales Volume after Year 1

Bags/Case Per Case Sales Price to Retailers ($ per bag) 3.00$ Based on sales price / bag and number of bags / case Coupon Costs ($ per bag) 0.20$ Based on coupon per bag and number of bags per case Commission (percent) 6.00% Percentage of sales price paid to brokers

Total Cost ($) Useful Life Annual

Slotting Costs 6,000,000$ 1 Expected slotting costs to be expensed over n years Package Design Costs 2,000,000$ 1 Expected packaging design costs paid in the first year Sales Salaries 400,000$ Expected annual additional sales and marketing salaries to be paid

Case Configuration: Panel A: Sales and Marketing Data

Sales Price/Coupon Costs/Commissions:

Slotting/Package Design/Sales Salaries:

Forecasted Sales Volume (Cases):

Table 1: Chicken Sensation Feasibility Data

Percent Cost/LB Per Case ($) Chicken 20.00% 2.0000$ Expected cost of chicken per Chicken Sensations pound Vegetables 65.00% 0.5000$ Expected cost of vegetables Chicken Sensations per pound Spaetzels 15.00% 0.1500$ Expected cost of spaetzels per Chicken Sensations pound Total (Must be 100 percent) 100.00% Total must be 100 percent Weighted Average Raw Material Cost Weighted average cost per pound of Chicken Sensations Pounds per Case

Total Raw Material Cost per Case Chicken Sensations cost per case (15 pounds per case)

Cost per Bag/Box ($) Qty/Case Per Case ($) Bags 0.20$ Based on price / bag and number of bags per case Box 0.30$ 1 Expected price per box with 1 box per case

Total Packaging Cost per Case Total packaging costs of bags and boxes per case Total Direct Material Costs per Case Total Chicken Sensations materials and packaging costs

Cost Per Lb ($) Lbs/Case Per Case ($) Direct Labor 0.30$ Based on labor costs per pound and number of pounds per case Variable Manufacturing Overhead 0.40$ Based on var. mfg. overhead per pound and number of pounds per case

Total Coversion Cost per Case Total conversion costs per case

Total Variable Product Cost per Case Total direct material and conversion costs per case

Total Cost ($) Useful Life Annual

Depreciation

Retrofit Costs 2,000,000$ 5 Expected retrofit costs and depreciable life

Raw Material Percents/Costs (per lb):

Packaging Costs:

Conversion Costs:

Retrofit Costs:

Panel B: Production and Cost Data

 

 

Case Questions: Would you decide to “hatch” Chicken

Sensations? Put yourself in Vicki’s shoes. Prepare an analysis

that will guide PFVC’s decision on whether to launch

Chicken Sensations.

1. Economic feasibility analysis: Perform an economic cost-

benefit 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.) To aid your analysis,

perform the following tasks:

a. Quantity, revenue, and cost conversions: Take Vicki’s

data from Table 1 and compute the quantity, revenue,

and cost conversions to complete Table 1. For

example, calculate annual sales revenues (in cases),

sales revenue and variable cost amounts per case, and

annual fixed cost amounts.

b. Forecasted contribution margin income statement:

Prepare a forecasted Chicken Sensations contribution

margin format income statement for year 1 based on

the projected data gathered by Vicki.

c. Breakeven analysis: Prepare a breakeven point

analysis (in cases and sales dollars) for the year 1

forecasts of Chicken Sensations.

d. Margin of safety: Prepare a margin of safety analysis

(in cases and sales dollars) for the year 1 forecasts of

Chicken Sensations.

e. Sensitivity analyses: Prepare sensitivity analyses to

examine how robust year 1 results are to changes in

projections for (1) the sales volume of cases, (2) the

sales price per bag, and (3) the cost per pound of

chicken. Assume that these amounts can change for

three different projection levels as reported in Table 2:

(1) a pessimistic level, (2) the original level, and (3) an

optimistic level. Table 2 shows that the sales volume

(in cases) will be 75% of the original year 1 sales

forecast, the sales price per bag will only be 90% of

the original forecast (or $2.70/bag = $3.00/bag × 90%),

and the cost per pound of chicken will rise to 112.50%

of the original forecast (or $2.25 /lb. = $2.00/lb. ×

112.50%) for the pessimistic level. The original level

reports the results using the original projections in

the case. Under the optimistic level, the sales volume

forecast (in cases) will be 125% of the original year 1

sales forecast, the sales price per bag will increase to

110% of the original forecast (or $3.30/bag = $3.00/

bag × 110%), and the cost per pound of chicken will

decrease to 87.50% (or $1.75 /lb. = $2.00/lb. × 87.50%).

Report your sensitivity analysis results in Table 3.

IMA EDUCATIONAL CASE JOURNAL VOL. 10 , NO. 2 , ART. 3 , JUNE 20175

Table 2: Sensitivity Analysis Levels

Parson Vegetable Company Sensitivity Analysis Levels (Percent of Original Projections)

Chicken Sensations

Pessimistic Original Optimistic

Sales Volume Case Forecast 75.00% 100.00% 125.00% Sales Price per Bag 90.00% 100.00% 110.00% Cost per Pound of Chicken 112.50% 100.00% 87.50%

 

 

2. Impacts: Assess the impacts of your decision:

a. Benefits and harms: What benefits/harms result and to

whom?

b. Rights: What rights are being exercised or denied and

by/to whom?

c. Result: Do these impacts modify or change your

decision? How?

3. Responsibilities: What responsibilities are present and

how do these responsibilities influence your decisions

and actions?

a. PFVC management: What responsibilities do Richard

Lawson and PFVC management have in this situation

and to whom?

b. Vicki Hoerning: What are Vicki’s responsibilities in

this situation and to whom? You can apply the general

standards in the IMA Statement of Ethical Professional

Practice (https://www.imanet.org/insights-and-trends/

business-leadership-and-ethics/ima-statement-of-

ethical-professional-practice?ssopc=1) to help you

identify specific responsibilities for Vicki in this

situation.

IMA EDUCATIONAL CASE JOURNAL VOL. 10 , NO. 2 , ART. 3 , JUNE 20176

Table 3: Reported Sensitivity Analysis Results

Parson Vegetable Company Sensitivity Analysis Results

Chicken Sensations

Pessimistic Original Optimistic

Operating Income Contribution Margin Ratio Profit Margin Breakeven Sales (in Cases) Margin of Safety (in Cases) Margin of Safety Ratio

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