Capital Budgeting and Budget Analysis: The Hershey Company Case

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The Hershey Company is a leading international American manufacturer of chocolate and other sugar confectionery products like mint, gum and refreshment products. The firm generates most of its operational capital from the sale of its products both in the local and international markets. Internationally, the firm is a stronghold in Canada, Brazil, Mexico and India. Being a public company, the shares of the firm are listed in the security markets of the countries in which it operates. Through the sale of shares, it generates additional capital. However, after announcing the pretax profit, the firm ensures that it distributes back dividends to its shareholders depending on the number of shares each member holds (Mary, Cathy & Jane, 2006).

In the financial year 2007, the firm operated steadily beating competitors who exist in most of its markets thus making a marginal profit among North American firms. The competition was stiff accompanied by increased costs of production as dairy products became rare in the years that followed. There was also the need to increase the advertising costs so as to survive the competition. In the markets it operates in including the United States of America, there are other local companies that produce and distribute similar products. It, therefore, calls for effective operational management to survive in the murky markets (Jeffery, 2001). All these costs that it had to incur led to the decline in the value of dividends to shareholders in comparison to the preceding fiscal year, 2006. In the fourth quarter of the 2007 fiscal year, each share had a dividend of 38.21 down from 48.96, a deficit of more than ten US dollars and this was attributed to the unfavorable market forces experienced in the year.

The following fiscal year was good for the firm because it managed to pay higher dividends to shareholders. The weatherman predicted that the year would experience adequate rainfall and this implied that dairy products would be abundant across the American region. With an abundant supply of milk, the price of raw milk and sugar would go down considerably.. This would consequently cut down the cost of production for the company. This is a trend that would result in the appreciation of the shares of the firm thus attracting more investors.

Manufacturing costs take forty-five percent of the firm’s net sales. In the year 2007, the firm had a comparatively low sale totaling up to $ 3,500,000. This performance was considered low given the fact that in the previous year the sales had amounted to well over four million. With this product sale, the amount that got allocated for manufacturing in the year 2008 would be $ 1,575,000. Despite being relatively small, this figure would be manipulated effectively to result in better returns for investors. The firm had diversified in the 2007 financial year as it increased its presence in the American market, this would simply mean that the sources of its revenue would increase and so would its profits (Donaldson, 2007).

Other variable market costs such as transportation and maintenance costs that conventionally consume fifteen percent of the net sales would be allocated $ 525,000. This figure is relatively smaller than that which was set aside in the 2007 financial year, but just as was the case with the manufacturing costs, this would also be manipulated to get the best results for the company. Currently, the firm has enough trucks fitted with refrigerators to ensure that the products reach all destinations within the United States. A bigger percentage of this allocation would thus be set aside for the payment of employees and miscellaneous expenses.

The projection of the 2008 financial year is accompanied by a number of assumptions some of which hang the future prospects of the firm. The amount set aside for manufacturing is very small given the firm’s enormous size. To effectively deliver the projected outcome; it should be assumed that other market factors would change for the better. The number one factor assumed to improve is the availability of raw materials. With more milk being readily available from the framers, the price per liter would be manipulated by the buyer, who in this case will be the firm. This would ensure that the firm gets maximum profit from very little capital. It is only such a trend that would make the firm survive an entire year on such a small allocation (Bernard, 2007).

However, should the prediction by weather forecasters fail to materialize, the firm will be forced to look for an alternative source of funding most probably borrow from other financial institutions. This would result in losses for its shareholders as it will be the second loss in a row.

$ 525,000 is by every means an amount that is far much insufficient compared to other variable marketing costs. It assumes that no employee would ever get promoted. This would require no pay increment and no truck would require replacement. It is only with such factors kept constant that the firm would make it through on such a meager budget.


Bernard, K. (2007). Structural Fighting: Strategies and Tactics. New York City: Jones and Bartlett.

Donaldson, S. (2007). Income taxation of individuals: cases, problems and materials. Thomson West; St. Paul University Press.

Jeffery, F. B. (2001). Introduction to Business Law. Boston: Boston University press.

Mary, C., Cathy, K. & Jane, T. (2006). Accounting: A smart Approach. New York: Mc Graw Hill.

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