High Performance Corporation (HPC) is deciding if they should proceed with a new product roll out of Energy Gel and if they do proceed with the project they are determining how to evaluate theEnergy Gel project. There is a clear line in the sand between Mr. Winkler and Mr. Leiter on how to evaluate the project, specifically regarding how to account for using Energy bar’s excess capacity for producing Energy Gel.
After reviewing the arguments of both managers we agree with Leiter that the Energy Gel project should be evaluated on the full cost approach as this will best represent the project’s true potential. We agree with Leiter that the energy gel project should not have a “free ride” on the equipment utilized by both projects because the equipment was designed and purchased for Leiter’s department. By increasing the utilization of the equipment you are depreciating the capacity of the equipment at a faster rate and ultimately decreasing the long term capacity from Leiter’s group at no cost to Winkler’s group.
We also have concerns surrounding demand of both products. If demand is increased or decreased at significant levels how will this affect the use of equipment? For Example: if Winkler under estimated the demand for the Energy Gel and there is a surge for more capacity how will this be handled? Would Letier’s group be expected to reduce their capacity or would new equipment than be purchased? We agree with Leiter that in a new market each project should be measured against the same start -up variables and evaluated at the full costs.
Cannibalization is a common factor to be considered when any company introduces a new line of products and even though manufacturers are promoting energy gels as an “entirely new kind of sports nutrition”, we believe that cannibalization cannot be ignored in similar energy supplement products, as in energy bars and energy gels. At the same time we see no evidence to support Leiter’s 10% cannibalization projection and would need more evidence to support such a large percentage payment.
We believe a smaller percentage or capped percentage per year and for a predetermined number of years is a more appropriate model to support any loses that Leiter’s group may suffer. Cannibalization cannot be ignored, especially when it can effect another department’s contribution to the business, so we support a payment structure that is defined by evidence of accurate cannibalization percentages. In continuing to evaluate the project and determine any additional costs associated with the Energy Gel project we believe that Winkler must account for all overhead costs associated with the project.
We agree with Leiter’s projection of 1 2% on general and administrative expenses and an 8% growth per year based on past energy bar expenses. We believe that equipment utilized in any capacity needs to be accounted for in Winkler’s overhead costs. Though we support Leiter’s general and administrative projections we see no evidence to support the idea that the Energy Gel project would utilize more overhead than any other project and we feel these additional expenses would not be accurate for the evaluation of the project.
