Energy Gel: ?a New Product Introduction

Energy Gel: 
A New Product Introduction (A)

Case Analysis

Statement of Problem

HPC is a large U.S. food and drink conglomerate with approximately $1.9 billion in annual sales, consisted of three divisions: food, drink, and international operations. Each division controlled several product lines. Its Vice President, Harry Wickler is considering and analyzing to launch a new Energy Gel project. However, there are two main issues along with this project. First, did the potential cannibalization of HPC's highly profitable energy bar products diminish the attractiveness of launching the new energy gel? Second, should the new project bear incremental or even full costs for the use of otherwise-idle capacity?

Statement of Facts and Assumptions

Regarding the using of the unused capacity of Energy Bar, I agree with Frank Nanzen's suggestion that Wickler would make a transfer payment to Leiter, similar to a rental fee. This would cover the costs directly related to the use of the equipment and would also help recover Leiter's investment in the machine, which was amount to $3 million in the past. In addition, either emotionally or financially, it is unfair for Leiter to cover 100% of the costs of the financing for the machines while Wickler is actually responsible for the usage of 40% now. What is more, Wickler should only consider taking on the product of energy gel in the first place if it will still be profitable while including the costs of the necessary machinery. According to the projections in the financial statements, it seems as if they will exceed capacity of the machines between the energy bars and gels together. Even more so then Wickler must consider machinery as a cost of his.

I agree more with Wickler's opinion that it is not necessary for these potential costs to be included in Wickler's estimates. Regarding lowering the percentage of mark Leiter sales, this should not be Wickler's problem. It is in the interest of the company to come out with new product, which will increase overall revenues and therefore a specific sales manager of a new department should not have to compensate existing managers of other departments whose sales will lower.

As a possible solution to this, I suggest that the upper management should reconsider methods, which now go according to your contribution margin. However, I did use it in calculation the cash flow, in order to allow for total company cash flow considerations.

Considering the higher overhead costs are reasonable since due to the long-run increase of the overall level of business activity, the Energy Gel project would lead to inevitably higher overhead base across the firm, for which Wickler's evaluation did not account. And also as a matter of fact, Energy Bar department does not have much free management capacity and therefore the same selling expenses for the Energy Gel on a per unit basis as the Energy Bar line would incur. As well as the 12% General & Administration expenses of the Energy Bar's in 2001, which would grow at 8% per year thereafter, should encounter.

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