Question

Home Meal Replacement (HMR) products also known as ‘meal solutions’, appear to be the latest trend in the food industry. In addition to affordable prices, product characteristics such as convenience, quality, quick and easy availability are the salient features important to consumers in a particular product market.

In February 1997, Crandon Farms introduced Café CRANDON as its HMR product line for retail consumers. As Crandon is known for its fresh products, Café CRANDON HMRs were developed to be fresh, never frozen. Café CRANDON HMRs introduced three flavors, fettuccine Alfredo, Fajitas, and stir fry. Servings per kit vary between three and four. Although the United States Department of Agriculture (USDA) originally wanted the package to state that it contained between eight and nine servings, Crandon successfully argued for the package to be described as containing three to four servings.

All the three Café CRANDON HMRs products could have their costs reduced dramatically by changing the form of the product from fresh to frozen. By changing to a frozen product, the company would save on product costs from $.31 per unit for the Fajitas HMR to $1.47 for the stir fry HMR, which is the maximum savings of the three. The cost savings for the stir fry HMR would be $1.20 and the shelf life of the vegetables would be increased from 14 days to an indefinite period. Additional cost savings could be obtained by using cheaper chicken containing more fat, which the company also made available for use but for short run only. Other factors the company had to consider before switching to the cheaper chicken includes reduced quality, inadequate portion controls, outsourcing packaging of chicken, increased overhead, and the loss of SHORT CUTS brand awareness. By using the company’s SHORT CUTS chicken, Crandon could possibly attain the processing plant efficiencies and the plant’s capacity utilization would increase. This would lower costs to the company as a whole. Also, the company’s trademark SHORT CUTS would be on the Café CRANDON package promoting the SHORT CUTS product line as well. This, in turn, would increase consumers’ willingness to cross buy Crandon’s products.

Target costing is closely linked with the company’s long-term profit and product planning process and allows the company to focus on profit and product in an integrated strategy, which does not discriminate against high-quality, high-price, high-margin products that require high costs. Using target costing, Crandon Farms was able to proceed in a very methodical and rational way to avoid having a very good, but non-competitive product in the HMR market. It began this process with satisfactory marketing research taking into consideration the wants and needs of the retail grocery chains and the consumers, both of which were extremely important to its success. By adhering to such policies and including its profits in the ingredient costs, Crandon could focus on the retail price and the retail grocer’s required gross margin. On the other side of the target costing process, Café CRANDON had to calculate its allowable product costs. Finally, the company had constraints placed on it in terms of the price (retail and wholesale), product characteristics, product quality, the supply chain, etc. Going through an iterative process and a cross-functional approach, the company found that it could meet the price, cost and product constraints by changing to frozen HMRs in the long run. Had this change not been made, the target costing process would have dictated that Crandon drop the Café CRANDON product line altogether.

The company will, no doubt, use other cost management techniques on an ongoing basis. In future, when the HMR products are to be changed or new Café CRANDON products are to be added, target costing will enhance the product and manufacturing planning process to assure greater efficiency and profitability.

Answer the following Questions (15 Marks):

i. According to the caselet, Café CRANDON has reduced costs by changing the product from fresh to frozen. Explain the various facets of target costing introduced by Café CRANDON in the process of cost reduction.

ii. Using target costing, Crandon Farms was able to proceed in a very methodical and rational way to avoid having a very good, but non-competitive product in the HMR market. Enumerate how Café CRANDON used target costing for effective strategic control.

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Answer 1

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