Happy Chips Case Study Analysis: ABC and Segment Profitability

This case study analyzes the Happy Chips company, focusing on profitability and cost analysis. It explores the pros and cons of Activity-Based Costing (ABC) and segment profitability assessment, crucial for understanding cost drivers and client-based profitability. The analysis examines the profitability of different segments (grocery, drug, and mass merchandise), revealing that the grocery segment is the most profitable, followed by the drug segment, while the mass merchandise segment is the least profitable. The study evaluates the impact of the "Buy 4 Less" option, concluding that it should be rejected due to increased client responsiveness costs and labeling fees. The report provides a detailed profitability analysis for each segment, offering insights into revenue, costs, and net profits. The study also discusses the advantages and disadvantages of ABC, which helps organizations accurately estimate costs by focusing on activities that drive costs, and segment profitability assessment, which provides transparency by breaking down costs by client demand. The conclusion emphasizes the importance of retaining profitable clients and making informed decisions based on financial analysis.

Happy Chips Case Study Analysis 1
HAPPY CHIPS CASE STUDY ANALYSIS
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Happy Chips Case Study Analysis 2
Table of Contents
Abstract......................................................................................................................................3
Introduction................................................................................................................................4
Pros and Cons of ABC as well as the Segment Profitability Assessment.................................4
Profitability Analysis for Each Segment....................................................................................8
Decision on whether to consider Buy 4 Less Option...............................................................10
Conclusion and Recommendations..........................................................................................11

Happy Chips Case Study Analysis 3
Abstract
An organization must retain and attracts any form of client or products that generate some
profits. Therefore, in this case study, the report presents analysis of ABC as well as segment
profitability analysis. This is based on their pros and cons. Activity-based costing concentrate
on the cost drivers, that is, activities that led the costs to upsurge. Hence, it is considered as
the best technique in gaining accurate estimates to costs which should be incurred in an
organization. It brings reliability and accuracy in cost fortitude by mainly concentrating on
the effect and cause relations in expense incurrence. Conversely, segment profitability
assessment breaks down the costs in accordance with the clients that demand these products.
It permits stakeholders of an organization to getter better sense of fluctuations which might
impact the overall numbers. As per the profitability analysis, it was established that grocery
segment was one of the most profitable segment over the three segments followed by drug
segment. Nonetheless, mass merchandise segment was considered the least profitable
segment. Therefore, the firms ought to reject the change anticipated by the Buy 4 Less. This
is based on the fact that the change would force Happy Chips would result in an increase in
client responsiveness costing and would also result in extra labelling fees.

Happy Chips Case Study Analysis 4
Happy Chips Case Study Analysis
Introduction
The main objective of any firm is earning profits. Therefore, organization has to retain and
attracts those clients who are profitable. Such is referred to as profitability analysis (Karadag
& Kim 2006). Profitability analysis is the financial analysis of an organization profitability
level. It could project profits and revenue potential specific to elements of the market or
organization like product types, geographic regions or age groups. In this sense, the section
present analysis of profitability level for every segment, that is, profit level for grocery, drug
and
Pros and Cons of ABC as well as the Segment Profitability Assessment
Activity-based costing entails a technique to monitoring and costing of various activities that
comprises of tracing the resource consumptions and then costing the final outputs. Under this
technique, assets are usually allocated to the activities and then those activities are allotted to
the cost objects (Anugrah 2012). They generally concentrate on the cost drivers, that is,
activities that led the costs to upsurge. Actually, the system offers significant assistance to
every firm aiming at having the activities for its operations. For such reasons, many
organizations apply this technique so that allocated costs of specific activities should be
relatively sufficient and that there would be no deficiencies. Hence, it is considered as the
best technique in gaining accurate estimates to costs which should be incurred in an
organization (Kaplan & Anderson 2007). Likewise, the system is significant for organizations
in identifying activities and assigning every cost for each activity. This is the technique used
in estimating cost successfully. It is mainly concerned with tracing of consumptions which
ought to be spent that has made organizations interested. Hence, it is not solitary a means of

Happy Chips Case Study Analysis 5
saving cash but it is a mean of using resources in the most productive manner. Moreover,
organizations should acquire several benefits associated with this costing technique including
opportunity to becoming successful and competitive worldwide (Gupta & Galloway 2013).
To clearly or better comprehend this costing technique, hear are few advantages and
disadvantages of ABC.
ABC offer several benefits to an entity. For instance, it offers more accurate technique of
product costing, resulting in more accurate pricing choices. This upsurges indulgent of the
cost drivers as well as overheads and making non-value and costly accumulation operations
quite visible, permitting organization managers eliminate or reduce them (Lievens, Van den
Bogaert & Kesteloot 2013). Besides, ABC enhances efficient challenge of the operating costs
in establishing better means of eliminating and allocating overheads. Additionally, it
enhances improved customer and product profitability analysis since it supports performance
management approaches like scorecards and continuous improvement (Turney 2005).
Basically, the most significant advantage of ABC is accuracy of the procedure of valuation in
respect to its product line, its final consumers, stock-keeping elements applied by
administration and network as well as class used in rationalizing flow of products from
producers to end-users (Emblemsvåg 2013). It brings reliability and accuracy in cost
fortitude by mainly concentrating on the effect and cause relations in expense incurrence. In
fact, the system recognizes that activities are the one that cause costs but not the products and
products are the one that consume these activities. In essence, it offers correct and reliable
cost data in scenarios of higher diversity amongst product manufactured like low-volume
products or the high-volume products (Demeere, Stouthuysen & Roodhooft 2009).

Happy Chips Case Study Analysis 6
Moreover, ABC better helps in process of comprehending perception of the overhead
expenses or outlays; that is apportionment of the mutual businesses assets or capital applied
by particular product lines and relations to particular cost drivers. It utilizes several cost
drivers, some of which are considered transaction based instead of product volume (Shander
et al. 2010). ABC is relatively easy to interpret and comprehend, operational, reachable and
virtually executable across all sorts of the corporate setup. It utilizes unitary cost or the
marginal costs concept as computational base contrary to traditional costing technique that
apply total costs. Additionally, ABC is practically of greater assistance in ear-marking and
ascertaining matters within an organization operation that are stress or problem on it such as
non-value adding or wasteful services. It works well with the performance management
schemes that are applied by greatest of the human resource divisions in a modern-day
business environment (Gosselin 2006). It offers information on the transactional volumes and
cost driver rates which are crucial to organization management for the performance appraisal
and cost management of the responsibility divisions. These cost driver rates could be utilized
for designing of fresh products or current products as they signify overhead costs which are
more likely to be used in costing products.
It also permits organizations to execute costing tactics across other diagonals of an entity as
the business processes, value additional channels and supply chains that are optimally and
ably assessed in this process. Furthermore, it assists in benchmarking process that is crucial
portion of the quality control scheme within an organization (Askarany, Yazdifar & Askary
2010). Moreover, ABC mimics actual organizational procedure as misappropriation of the
mutual pool possessions taking place in similar manner as the common resources are utilized
in an entity.

Happy Chips Case Study Analysis 7
Despite the aforementioned advantages, ABC has a small share of drawbacks. First, the data
collection process in ABC is quite time consumer. Further, capital outlay on the ABC and the
succeeding operating costs could be the chief hindrance for organizations. Furthermore, ABC
is quite clear which some organization management would fail to support as they tend to
maintain some issues hidden from owners of an entity (Askarany, Yazdifar & Askary 2010).
Conversely, segment profitability assessment is the form of analysis that clarifies which
forms of clients are profitable and which ones are unprofitable. This breaks down the costs in
accordance with the clients that demand these products. The chief advantage of this form of
analysis is transparency. For organization operating in diverse geographical areas or
categories, segment profitability analysis could reveal the areas that are profitable and the
ones that drain on it bottom line (Askarany, Yazdifar & Askary 2010). In case the analysis
shows an entity its international clients are quite profitable than the domestic ones, it could
prompt some adjustments in its strategic direction. Thus, once done appropriate, it keeps
organization’s management from hiding all the unprofitable ventures. Moreover, segment
profitability analysis permits stakeholders of an organization to getter better sense of
fluctuations which might impact the overall numbers. In case an entity reports much higher
profits than anticipated, for instance, the analysis indicates where those profits are coming
from. Stakeholders could look at such report in determining whether these figures are
sustainable.
In spite of such advantages, segment profitability analysis could place much focus on the
short-term figures. For instance, an entity might create divisions only for its online
operations. Such divisions could run substantial deficit prior to right individuals as well as
infrastructures are put in place. In case such losses are outweighed by an entity’s entire
performance, they may not stand out on it financial reports (Karadag & Kim 2006).

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Nonetheless, breaking the figures as data point through segment reporting could result in
pressure to lessen the losses in order to enhance the short-term profits.
Profitability Analysis for Each Segment
Basically, by sing Happy Chips income statement as well as logistic costs by the segment
statement, profitability analysis of the company was completed to determine net margin,
fixed costs and revenue while coming with ultimate objectives of the profits per segment.
Results of profitability analysis are as shown below.
Happy Chips Segment Profitability Analysis
Accounts Grocery Mass Merchandise Drugs
Total units to be sold 2,100,000 400,000 365,000
Selling price $1.70 $1.40 $1.90
Total sales 43,570,000 $560,000 $693,500
Costs of Goods Sold
per unit
$1.07 $1.07 $1.07
Number of units 2,100,000 400,000 365,000
Labelling costs 0 64,000 0
Costs of sales $2,247,000 $492,000 $390,550
Gross Profits $1,323,000 $68,000 $302,950

Happy Chips Case Study Analysis 9
Fixed Expenditures
Delivery costs $520,000 $32,760 $145,600
Stocking Costs $468,000 $32,760 $116,480
Total fixed
expenditures
$988,000 $65,520 $262,080
Net profit for the
company
$335,000 $2,480 $40,870
The amount of stocking expenditures as well as the delivery expenses for each of the three
segments is considered as product of the cost or delivery multiplied by years or deliveries
multiplied by the number of retail areas served.
For instance, grocery segment stocking expense = $18 * 2 deliveries per week * 52 weeks *
250 grocery areas = $468,000
On the other hand grocery segment delivery costs = $20 * 2 deliveries per week * 250
grocery areas = $520,000
For the drug segment stocking costs = 16 * 1 deliveries per week * 52 weeks * 140 drug
locations =$116,480
While delivery costs = 20 * 1 deliveries per week * 52 weeks * 140 drug locations =
$145,600

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On the other hand, for the mass merchandise stocking costs = 35 * 3 deliveries per week * 52
weeks * 6 merchandise locations = $32,760
While delivery costs = 35 * 3 deliveries per week * 52 weeks * 6 merchandise locations =
$32,760
As per the above results, it can be viewed that grocery segment was one of the most
profitable segment over the three segments. This segment contributed around 50% of the unit
revenues but carried roughly 80% of the company net profit. On the other hand, the results
show that drug segment contributed over 20% of the company net profit while generating
over 20% of the firm’s total revenues. Ironically, mass merchandise segment or the Buy 4
Less proposal produced over 27% of the unit total revenues and under 22%of revenue though
it is expected to contribute to $878.40 loss every year as a result of expensive labelling need
of the Buy 4 Less. Generally, Buy 4 Less requires the firm to produce a label and stocker
which would cover proposed retail price with fresh Buy 4 Less prices.
Decision on whether to consider Buy 4 Less Option
As per the profitability analysis, the firms should reject the change anticipated by the Buy 4
Less. This is based on the fact that the change would force Happy Chips would result in an
increase in client responsiveness costing and would also result in extra labelling fees. In fact,
as it can be viewed from segment profit analysis, the results goes against Happy Chips
managers ideas that the Buy 4 Less would be clearly the company most significant client and
the firm should immediately execute the proposed changes. As the matter of fact, Buy 4 Less
are certainly the worst clients, costing the firm more than $875 every year.

Happy Chips Case Study Analysis 11
Moreover, Happy Chips must not accept the variations proposed by the Buy 4 Less since it
would ultimately end up losing the firm even more cash that it is currently experiencing. This
goes alongside with ideas of directors of production or manufacturing that believed that extra
manufacturing expenses needed to meet the Buy 4 Less’ desires was relatively too high
(Bowersox, Closs, Cooper & Bowersox 2013). Therefore, by only dropping the Buy 4 Less
as the chief retailer, Happy Chips would directly increase its profits and could utilize the
additional units to slowly trying to expand again and begin achieving little further out of
Detroit metropolitan location.
Conclusion and Recommendations
Generally, Happy Chips should put the entire Buy 4 Less units in its most profitable segment;
that is grocery segment, which would make it sales force happy. This is based on the idea that
grocery segment was one of the most significant and the company’s best client. Additionally,
Happy Chips should look t price increment in order to maximize its profitability. In case the
company increases its price by around 20% across remaining two segments; this would take
its prices to around $2.28 in grocery segment and around $2.76 in drug segment. The
increment in their prices would result in $15,200 increment in its present grocery segment
total revenue to around $91,200 and $8,280 increment in annual drug segment to around
$49,680. Generally, grocery segment income would grow to $22,7400 while drug segment
income would rise to $10,206 (Bowersox et al. 2013).
Further, ABC proposes that costs ought to be traced back to activities and those activities
must be linked with particular client segment or products meaning that this firm operational
cost must be closely associated to processes that have created them. Hence, applying ABC in
this case could raise price in every segment that is the primary client and requires operations

Happy Chips Case Study Analysis 12
more regular basis, while lowering prices to other segment which does not need similar
frequency of the services. Besides, by looking at the process the company might view an
opportunity in expanding outside Detroit area through enticing of fresh retailers with
relatively lower prices, while making up difference by raising prices on largest retailers. In
fact, through completion of profit analysis, the company has better view of what is required
within the firm to improve its profitability. In fact, the analysis displayed that grocery
segment was producing around 8% of the profit and drug segment was producing profit of
over 20% and mass merchandise or the Buy 4 Less segment was losing around $900 yearly.
Hence, with this notion, it is evident that Happy Chips should remove the Buy 4 Less as
retailer and work on the net profits in its other two major segments. This would be achieved
by raising the prices by around 20%, which in turn increases its net profits by more than
280%. Secondly, the company should consider using ABC in lowering or raising operational
costs by process that creates these costs and allowing them to try and expand outside the
Metropolitan Detroit region.