General Foods is a large corporation organized by product lines. They are evaluating Super Project, the manufacture of a new powdered dessert. Crosby Sanberg, a financial analysis manager, must determine the value in accepting the proposal, along with J.C. Kresslin, the Corporate Controller. The Super Project will increase profit with a payback period of less than ten years. The proposed capital investment for the project is $200,000 ($80,000 for building modifications and $120,000 for machinery and equipment) and production would take place in an already existing building in which Jell-O is manufactured using the available capacity of a pre-existing Jell-O agglomerator. .
Sandberg has analyzed the different investment proposals based on three different capital allocation techniques. The three different cash flow evaluation alternatives (Incremental, Facilities-Used, and Fully Allocated) differ in the way that the cost of existing facilities and future increases in overhead are allocated. The acceptance or rejection of the project relies on the project's costs. As Sanberg looks to compare Super Project with current profit criteria, recent discussion has brought about what the proper evaluation technique is for their cash flows; specifically, in concern to the relevancy of sunk costs. The problem for General Foods is to decide what the best method for evaluating the Super Project was since each method produced drastically different returns. .
Issues.
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General Foods has quite a few factors to consider when determining relevant cash flows in their analysis of the project. Multiple factors for consideration are whether or not to account for test market expense, the allocation of overhead expense, the allocation of charges for agglomerator and capacity use, and erosion of Jell-O sales. Under the analysis of an incremental basis, management included the incremental fixed capital of $200,000, which included packaging equipment.
