Seneca Foods

Case Study (Ch 5 Problem 5.2)

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Key Pointers of Seneca Foods Inc

 Production cost are low and they spend no money on ad and promo
 They provide good margins
 It can sell products at low prices below the price of national brands such as Frito-Lay
 Approached by several large discount food chains
 Each discount retailer wants the recipe for the snack foods to be customized to its own-tastes
 They have a set of differentiated products required through contract manufacturing
 Wish to expand to different products
 However, too much variations could increase cost per unit
 Seneca has to weigh their volume increase against customization and could potentially lose its
brand identity
 Hence they have to focus on Cost leadership and cost could increase due to customization
 Hence Seneca will eventually become a contract manufacturer
 They just could not be a low-priced alternative
 Managers thought of a new opportunity of growth and a prime producer of retail brand to national
chains
 The private label will increase warehousing costs
 The supermarket chain need extensive assistance and support to learn for advertising,
merchandise, and promote the store-brand products to be competitive
 The local supermarkets are not capable enough to promote products itself, whereas the national
brands use their own sales team
 Seneca delivered only to retailer's warehouse, and they had a narrow range of products aimed at
the high-volume snack food
 They are also getting good terms from few suppliers
 Cost of providing new services would increase fixed cost
 The produce range used to be narrow and focused and the process was therefore efficient. Thus
new services would cost more because of high volume sales
 They were currently working on traditional costing method
 Customization will result in more change overs and thereby increase in cost and it will create
complexity
 Heather fears dilution of high volume and small range. Under new scheme, the production
process will be complex and less cost effective and increase cost.
 Also she do not trust the sustainability of the new product line as it may be a negotiating ploy
 Capacity utilisation will increase and less units to recover fixed cost
 The cost capture and pricing has to be on the basis of additional activities required
 The product mix profitability comes down and overall production cost and complexity increase,
bring down contribution margin
 There could be a requirement of more sample testing and more supervision. This will lead to cost
increase
How can activity-based costing help Heather Gerald assess the attractiveness of the proposed
policy?
  The economy of scale also would come down and the existing standard cost systems were
inadequate, and they need to do activity-based costing
 ABC will help in identifying additional activities and corresponding cost involved and to
identify value added vs non-value additions
 It will help her to identify labels
 ABC will help in reducing cost by Eliminating, Selecting, Reducing, Sharing
 Certain activities are required only for new products and it will help to do driver analysis
 Cost reduction can be enabled by identifying key cost drivers
 This will help to measure the performance
 Assess impact of labour overhead in new model, as existing model is heavy in favour of
material and machine cost
 ABC enables effective challenge of operating costs to find better ways of allocating and
eliminating overheads

What ABC systems would be helpful to guide the profitability of the strategy and assist Seneca
managers in making decisions?

 ABC will help in assigning overhead costs to only those products

 It can help in can decide which processes add more value and systems planning
 It can also be used for target costing, batch level ABC and customer level ABC
 ABC can also be engaged in product level to identify the needs
 It will help in forecasted sales sustainability over future period