ACC640 Week 4 assignment Real­world case study

Name

ACC640

AGCU

25/10/2022

Real­world case study

Existing Cost and Profitability Trends

The existing cost and profitability trends will be analyzed by investigating the income statement, balance sheet and cash flow statement. The income account is the profit or loss account with “Revenues” that result from the sales of goods and services. Balance sheet accounts are assets, liabilities, equity and owners' equity. Cash flow is a report detailing cash movement for a given period.

Based on the financial statements, the existing cost trend of PepsiCo, Inc. is $3.2 billion, which implies that it is increasing at a rate of 87% from 2011 to 2015. It has a gross margin of 25% and a profit margin of 17%, representing the current ratio. The gross margin is the percentage income statement does as its own cost of sales; this is PepsiCo’s effective cost for production. The profit margin is the percentage income statement does as its selling price or inventory; this is the difference between revenue and costs. By analyzing operating activities, PepsiCo, Inc.’s revenue totaled $3.2 billion in 2011 due to the company’s sales volume of 109 million cases compared to 100 million cases in 2010. In terms of 2012 revenue, PepsiCo, Inc. expects a sales volume of 108 million cases; this is an increase from the year before due to its sale of new products.

On the other hand, the profitability trend of PepsiCo, Inc. is $0.1 billion, which means that expenses are increasing from 2011 to 2015 at a rate of 20%. The operating expenses of

PepsiCo, Inc. are expected to be $2.4 billion in 2012, up from the 2011 expense of $2.3 billion (Park, 2019). On the income statement, PepsiCo’s gross profit (before finance and administration costs) is $1 billion; this is a decline for the current year compared to the year before because of its expenses. However, in terms of 2012 gross profit, it may increase because of new products introduced and price increases on existing products and promotional campaigns such as Diet

Pepsi and Pepsi Max.

Impact of pricing decisions

Pricing decisions on long­term revenue growth and cash flow will have effects. These effects include the following:

Many products and services that PepsiCo sells could experience revenue growth by changing how they are priced about each other. For example, a reduced price for Pepsi would increase total revenues from its global portfolio of food products. If PepsiCo increases the price of one brand so that it can maintain a higher profit margin on this brand’s sales volume, then there will be a decline in overall revenues (from the global portfolio). A reduced price for Gatorade or Tropicana Juice would tend to decrease both those brands' total revenues since those products are sold in the same category of beverage outlets.

Many products and services that PepsiCo sells could experience cash flow effects by changing how they are priced about each other. By moving one lower­margin product to a higher ­margin product, PepsiCo could increase cash flow by reducing operating costs. For example, if a lower­margin beverage like Fanta (a cola drink) were moved to a higher­margin beverage like Mello Yello (a citrus soda), the overall profitability of the entire portfolio would be improved. However, if Fanta and Mello Yello were put into a comparable price band so that they sold for the same price, then consumers would purchase less of each because of the reduced margin on their purchases. The price change would lead to a decline in the revenues of both Fanta and

Mello Yello.

Many PepsiCo products will experience each of these potential impacts by changing the way that they are priced. For example, suppose PepsiCo reduces the price of one lower­margin item (like Gatorade). In that case, this could result in a revenue growth impact as consumers purchase larger quantities at a lower price. If a high­margin item is moved from a higher­ to the lower­price band, such as Tropicana Juice being sold for less than Mello Yello, this could result in a revenue decline for Gatorade. If a low­margin item is moved from a higher­ to the lowerprice band, such as Fanta being sold for more than Mello Yello, then this could result in a revenue decline for both Fanta and Mello Yello.

Cost allocation

The role of cost allocation is to disperse the costs of production across products in order to make them affordable for the customer. This allows each product to be sold at a competitive price and creates a level playing field among other companies that produce similar products (Granot,2020). For example, when allocating costs, PepsiCo might have a cost of $1 per unit for labor so they can sell their Gatorade at 3 cents per ounce rather than going with 2 cents per ounce and charging their Pepsi at 10 cents an ounce. The total cost of the Gatorade would be divided by 7 (15 units x 5 ounces) resulting in 53 cents for each unit with 3 cents allocated to labor and 50 cent allocated to materials. Since Pepsi products are still more expensive, PepsiCo could charge the customer $3.50 (2 cents per ounce + 10 cents per ounce) for their product while making a profit of $1.00 on each unit sold. Some economists have argued that cost allocation is not necessary and that producers should simply develop their products based on what they think their customers will pay without any concern for price competitors might charge. However, it is certain that communication among all companies in the industry determines what costs are; this makes the market more efficient by eliminating waste and reducing costs through better information gathering.

Recommendation

I would recommend the adoption of a main platform to view and forecast market trends, the implementation of complex account planning, and the adjustment of their business model.

The introduction of a single, unified platform to view and forecast market trends would allow PepsiCo to have a better perspective of the company’s overall performance at a macro level. This could help the management to foresee potential problems, better interpret information collected from various areas, and more effectively communicate with all employees. Through this approach, each department can share their knowledge and provide the company with useful information regarding their specific area. The information will be transformed into meaningful insights that are then proven by concrete data. PepsiCo is an international corporation operating in numerous different countries, so it is very important for them to adopt a uniform and standardized process of collecting market data through several different departments' efforts.

PepsiCo should implement in­depth account planning and customer­centric marketing strategies to improve their profitability by targeting groups of consumers that would be most likely to purchase their products. Account planning is a method that helps companies establish a more comprehensive relationship with customers and meet their needs (Foster,2017). It can be developed using different research methods, but there is always a careful analysis of both qualitative and quantitative data through the use of customer interviews, surveys, focus groups and so on. Management has to be willing to abandon certain products in order to reduce costs for other more profitable ones. In addition, new markets can be explored when considering the current financial situation of the company.

The transition from a traditional system of distribution to channels that combine online and retail distribution can be considered a “transition” for PepsiCo. In this new model, all of the company’s products are sold to the consumer through their website and then are shipped directly to them. However, it is too early to see the success of this new business model as it has not yet been implemented by all of their brands worldwide. The company should be prepared to make changes depending on the situation at that time. As there is no standard way for companies to formulate such a business model, PepsiCo will have to adapt it as required. These recommendations for management could help PepsiCo avoid some negative expectations and identify potential issues before they become problems.

References

Sagong, M. C., Shin, Y. G., Kim, S. W., Park, S., & Ko, S. J. (2019). Pepsi: Fast image inpainting with parallel decoding network. In Proceedings of the IEEE/CVF Conference on

Computer Vision and Pattern Recognition (pp. 11360­11368).

Granot, D. (2020). The role of cost allocation in locational models. Operations Research, 35(2),

234­248.

Foster, G., & Gupta, M. (2017). The customer profitability implications of customer satisfaction.

Available at SSRN 45941.