The Super Project Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

FACILITIES-USED BASIS

Super Project would use half of an existing products’ agglomerate and two-thirds of an existing building. In addition the Super’s pro rata share of these facilities about $453 million were added to the incremental capital. Overhead costs that were directly associated to these vacant facilities were also deducted from incremental revenue on a per share basis. In this alternative, the return on fund employed was 34%.

Even though the existing facilities, which were utilized by Super Project were not incorporated as an increment on the project, but they were appropriate to the evaluation of the project because of it could be placed into alternative use. Despite the fact that incremental basis had the higher return, project would become questionable if the return on fund employed on a project was unpleasant after taking into consideration the shared use of existing facilities. Under these situations, General Food Corporation might look for a further profitable product for facilities.

In short, the facilities-used basis is helpful by putting diverse projects on a common ground for the purpose of comparative evaluation. The newly established product’s existing capacity should not be judged to be more appealing than another sensibly identical product, which forces an investment to be made in additional facilities.

FULLY ALLOCATED BASIS

After identifying that individual decisions for the expansion were certainly adding to a higher overhead base, General Food Corporation increased expenses made on investment and investment base established under the facilities used basis incorporating the provision for overhead expenses and overhead investment. These incremental changes were made in year five under the evaluation period of 10 year. Under this provisioning a number of decisions will be result in more pre-determined costs and facilities. The expenses such as overhead expenses included manufacturing costs, selling, general and administrative costs on a per unit basis are equivalent to Jell-O overhead costs. The invested capital of about $40 million for the overheads included a share of the distribution system assets. Under this alternative, the return on funds employed is equal to 25%.

Even though the overhead cost were recognized in the long run but it was charged from Super project in proportion with the level of each business activity, although decisions to invest additional overhead in term of dollars were made separately from decisions to increase volume and provide expanded facilities to support the incremental volume level. The contributing feature was that the sales force should be increased by 50% to fulfill the growing and progressively more compounded business demands. Furthermore, about half of the capital projects in the second fiscal three-year financial plan were in the ‘no payback’ class. These groups of projects largely involved ‘overhead facilities’, which were not directly associated with the manufacturing of products. However, they were necessary components of the total operational activity; consequently, it showed the collective effect of several decisions that were made in the past.

The Super Project was a significant decision, which would most likely to be added to more overhead dollars as mentioned earlier. From this project, its volume doubles the powdered dessert business segment, which increased individual projects businesses by 10%. Furthermore, investment should be made for the Super Project, which required a new production technology, agglomeration and packaging machine that involve a high-speed line.

CONCLUSION:

To evaluate the project using the incremental basis is not an inadequate way to measure a project’s worth when existing facilities are already generating more profits with a known future usage that will be utilized extensively. On the other hand, the fully allocated basis to evaluate the foremost new product proposals identifies that overheads will increase in proportion to the size and complication of business activities and it will provide the best optimal long-term projection of the financial consequences. In conclusion, the General Food Corporation must continue with the Super Project as its internal rate of return is higher with the net present value of $4,357,978 but General Food Corporation should adopt the fully allocation basis approach in order to continue as it would benefit them to expand in the near future.....................................

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