PepsiCo.: Comprehensive Product Costing

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About the product

The selected product is Mountain Dew. It is a carbonated soft drink that is owned, manufactured and distributed by PepsiCo. The product was originally invented in 1940. PepsiCo is a multinational entity that deals with the production of food, snacks, and beverage. It is a public company that trades on the New York Stock Exchange. Since the company has a presence across the globe, Mountain Dew is sold globally but, with a heavy presence in the United States and Canada. Also, the company has a production plant for the commodity on all the continents.

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Estimation of the selling price to the distributor

Selling price to the company = selling price to the distributor + (100% + 50% mark up)

Selling price to the distributor = Selling price to the company / (100% + 50% mark up)

A pack of 36 cans is sold at $27. Therefore, each can cost $0.75 (Amazon.com, 2016). The calculations are presented below.

Retail price to the company $0.75 per bottle
Mark up 50% on retail price
Selling price to distributor $6.81 / 150%
= $0.5

Gross profit margin and cost of sales

The gross profit margin for PepsiCo Inc. for the year 2015 was 55%. The calculations will be based on the assumption that the gross profit margin for 2015 is the same as that of 2016. If the product is sold directly to the customers without the use of a distributor, then the selling price will be $0.75. The calculation of gross profit and cost of sales based on the gross margin for 2015 is summarized in the table below.

Gross profit = Sales – the cost of sales

55% = 100% – the cost of sales

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Cost of sales = 45%

Estimated retail price to customers $0.75
Less: cost of sales (45%) $0.3375
Gross of profit (55%) $0.4125

If the product is sold to the distributors, then calculations of the cost of sales is presented below.

Estimated retail price to distributors $0.5
Less: cost of sales (45%) $0.225
Gross of profit (55%) $0.275

Analysis of competitive product

A major competitor of Mountain Dew is Sprite Lemon-Lime Soda. The product is manufactured by Coca – the Cola Company. The company is a multinational public entity that is based in the US.

Estimation of the selling price to the distributor

A pack of 32 cans is retailed at $26. Therefore, the price of each can is $0.8125 (Amazon.com, 2016). The calculations are presented below.

Retail price to the company $0.8125 per bottle
Mark up 50% on retail price
Selling price to distributor $0.8125 / 150%
= $0.5417

Gross profit margin and cost of sales

The gross profit margin for Coca-Cola Company was 60.5% in 2015. The calculations will be based on the assumption that the gross profit margin for 2015 is the same as that of 2016. If the product is sold directly to the customers without the use of a distributor, then the selling price will be $0.8125. However, if it is sold through distributors, then the selling price is $0.5417. The calculation of gross profit and cost of sales based on the gross margin for 2015 is summarized in the table below.

Gross profit = Sales – the cost of sales

60.5% = 100% – the cost of sales

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Cost of sales = 39.5%

Estimated retail price to customers $0.8125
Less: cost of sales (39.5%) $0.3209
Gross of profit (60.5%) $0.4916

If the product is sold to the distributors, then the calculation of the cost of sales is presented below.

Estimated retail price to distributors $0.5417
Less: cost of sales (39.5%) $0.2140
Gross of profit (60.5%) $0.3277

Reasons for differences in costs

A comparison of the two products above shows that Mountain Dew is retailing at a lower price than Sprite. However, Sprite has a higher gross profit margin and a lower cost of sales than Mountain Dew. Thus, it can be noted that the Coca-Cola Company uses a cost leadership strategy. The Company is able to sell the commodities at a lower cost due to economies of scale. In the case of Mountain Dew, it can be noted that PepsiCo Inc. makes use of a differentiation strategy. This strategy entails manufacturing products that are distinct from competitors that have key features that will make customers willing to pay a higher price (Drury, 2012).

Value chain

Value chain shows an array of activities that PepsiCo will carry out in order to deliver Mountain Dew to the market. The value chain comprises primary and supports activities. Some of the costs associated with primary activities are production materials, transportation costs, fuel, maintenance of production and storage facilities, labor costs, depreciation, promotion and advertisement expenses, factory overheads, and purchase of equipment. The costs that are associated with support activities are support and maintenance of software, cost of hiring, and administrative costs (Kinney & Raiborn, 2008).

Critical ingredient

Some of the major ingredients of Mountain Dew are carbonated water, sugar, citric acid, caffeine, and preservatives among others. The key ingredient that will be analyzed is sugar.

Change in price of sugar
Price of sugar in 2015 31.68 cents per pound
Percentage increase 1%
Estimated price for the U.S refined sugar 32 cents per pound
Estimated retail price to customers $0.75
Less: new cost of sales (45%) $0.3375
Increase in cost of sales $0.0023
Gross of profit (55%) $0.4125
Estimated retail price to distributors $0.5
Less: cost of sales (45%) $0.225
Increase in cost of sales $0.0023
Gross of profit (55%) $0.275

The estimated price for U.S refined sugar is 32.00 cents per pound for the year 2016 (American Sugar Alliance, 2016). Thus, the cost of sales is expected to increase by $0.0034 for retail and $0.0023 for distributors. If the company decides to continue selling the product at the same price and maintain the same amount of gross profit, then the increase can be offset by reducing overhead and other indirect costs (Atrill & McLaney, 2009). This can be achieved by increasing production efficiency through the use of improved technology. Otherwise, an increase in the cost of production can reduce the bottom line of the company. Also, the company should consider using other risk management techniques such as hedging and forward contracts (Bhattacharyya, 2011). This will minimize the risks associated with price fluctuations.

References

Amazon.com, Inc. (2016). Pepsi Cola – 36/12 oz. cans. Web.

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American Sugar Alliance. (2016). US sugar prices. Web.

Atrill, P., & McLaney, E. (2009). Management accounting for decision-makers. Europe: Prentice-Hall.

Bhattacharyya, D. (2011). Management accounting: marginal costing and cost-volume-profit analysis. South Asia: Dorling Kindersley (India) Pvt. Ltd.

Drury, C. (2012). Management and cost accounting. Boston: Cengage Learning.

Kinney, M. & Raiborn, C. (2008). Cost accounting: foundations and evolutions. New York: Cengage Learning.

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BusinessEssay. (2022) 'PepsiCo.: Comprehensive Product Costing'. 26 November.

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BusinessEssay. 2022. "PepsiCo.: Comprehensive Product Costing." November 26, 2022. https://business-essay.com/pepsico-comprehensive-product-costing/.

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