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Real World Case Study- Pepsi Co. Ashford University ACC 640 Advanced Managerial and Cost Accounting Real World Case Study- Pepsi Co. Pepsi is a large globally operating company with multiple food and beverage product lines. As a result of multiple product lines, where manufacturing and sales occur globally, management must make decisions regarding costs, profitability, cash flow, allocation of costs to various product lines and many other factors. Only through a thorough evaluation of these components can management make decisions that affect the overall trends of customer profitability, cost allocation to all product lines or consideration of product discontinuation. Upon review of Pepsi Co.’s 2018 Annual 10-K report submitted to the Securities Exchange Commission it has been determined the production costs and profitability are trending upward, determine the positive impact that pricing decisions will have on long-term revenue growth and cash flow,determine that cost allocation across the multiple product lines, and plans to reduce costs, and personalize ordersto improve customer profitability. The Pepsi Co overall is on an upward profit trend over the time frame of 2016-2018. From the time frame of 2016-2017 net profits increased approximately $726,000 while sales costs increased $576,000 and in the time frame of 2017-2018 net profits increased over $1. million yet the costs of sales increased by $9,000 from the 2016–2017 time- frame for a total cost
of sales of $585,000( PepsiCo 2018 10-K, 2018). Pepsi Co. additionally has advertising and administrative expenses associated with these periods with average costs for advertising of $4. billion, and average costs for administrative expenses of $2.5 billion( PepsiCo 2018 10-K, 2018). There are also $93 million in prepaid, of sunk costs, for advertising which is projected to be utilized during the annual NFL Super Bowl for sponsorship of the halftime show. Based on these figures, despite their slight up and down trends over this short evaluation period, Pepsi Co. will continue to have an overall upward trend in profits as well as in production and other costs associated with operations. With an increase or decrease of individual costs across any product line or over all products a manager could expect to see a corresponding increase or decrease in cash flow. Value to the company’s shareholders is produced by consumer cash flow (van Raaij, 2005). For example, if the pricing manager decides to reduce the cost per unit of diet Pepsi by two cents per unit with theoretical sales of ten thousand units per month there would be a decreased annual cash flow of $2,400 from this product line. If, however, the pricing manger increases the price of a product with higher unit sales such as Ruffles potato chips by twenty cents per unit with theoretical sales of 100,000 units per quarter would result in an $80,000 annual increase in cash flow. Should this pricing on Ruffles chips be maintained and sales do not decline because of the price increase then long-term revenue growth can be realized if Pepsi Co. Pricing managers increase the price of the best-selling products in small increments. However, long-term revenue growth can be affected by adding additional product lines, a decrease in costs, and moving more support departments in house, which will allow management to decrease their costs thereby increasing their cash flow and increasing long-term revenue growth or in cases where controlling interest are used to create joint beneficial ventures. An
allocation of costs of a successful product line then the company can lose profit because they were unable to produce the product at the rate of typical sales. Determining the profitability of customers whether large or small orders is an important factor to successful business operations. If a customer is using more resources than the revenue for which they produce, then a profitability analysis may be necessary to determine if a customer should continue to receive the service of the company. Customer profitability can be positively affected in favor of PepsiCo by imposing stricter credit terms on consumers, such as requiring a minimum purchase for companies of a certain size or the requirement of purchases across product lines which can help expand the sales of smaller product lines (van Raaij, 2005). Additionally, companies such as PepsiCo can seek alternatives which may reduce costs in marketing, sales, production, or preservation of resources. If PepsiCo were to lose a customer their overall revenue would be affected. Therefore, it is necessary to develop strategies that create mutually beneficial relationships between PepsiCo and is wide variety of consumer types. PepsiCo states that its customers range from independent beverage bottlers, to membership stores, to large box retail stores such as Wal-Mart and recognizes that should any of these key customers feel unsatisfied in their relationship that they could make a move to one of PepsiCo’s many competitors( PepsiCo 2018 10-K, 2018). If PepsiCo were to lean more heavily on sales via phone or internet versus in person sales, which reduces travel costs as well as helps in environmental preservation, they can increase their customer profitability due to reduction of costs. PepsiCo also mentions in their summary that laws regarding changes to the disposal of plastics or other packing materials are subject to change in the interest of protecting the world’s oceans, waterways, and wildlife( PepsiCo 2018 10-K, 2018). PepsiCo is not the only company that is required to operated under these laws.
Therefore, to improve customer profitability PepsiCo can seek to share the costs of disposal and responsible packaging with their customers and distributors which would serve to enhance a mutually beneficial relationship. Cost allocations, pricing decisions, cost management, and customer profitability are all imperative aspects of company sustainability. Companies want to maintain a profit and must take many steps to accomplish this. To determine if maintaining a relationship with a customer a company may need to perform a customer profitability analysis. Cost allocations allows companies to determine the amount of funds distributed to certain areas or certain product lines based on the revenue those areas or products produce. While there are many areas that companies must be aware of to ensure their financial success these areas relating to cost and price are among the most important.
