Energy Gel Case Summary
HPC is deciding on whether or not to launch a new product line. Furthermore, if the company decided to proceed with the project, then the new product, Energy Gel, should be evaluated. The Energy Gel case describes three approaches in order to estimate project costs which are direct cost advocated by Harry Wickler, full cost supported by Mark Leiter, and equipment based costing supported by Frank Nanzen. The direct costing basis only considers the variable costs that are directly identified with the Energy Gel project. However, it ignores many costs or benefits including cannibalization of the existing Energy bar product, use of valuable excess capacity, and the possible increases in the overhead expenses. On the other hand, in full costing basis, Leiter considers the project as a stand-alone entity, which ignores benefits from the use of excess capacity and fixed cost activities. Lastly, the equipment- based costing by Nanzen proposes that Wickler
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Therefore, the three different approaches to estimate Energy Gel costs and benefits are incorrect in at least some instances. The cash flow and with-without principle tell us that one should only be interested in the movement of cash when making capital expenditures. Also, any cash flows caused by an investment are relevant to a decision. Therefore, in the absence of strong competition, any lost profits due to cannibalization can be relevant. Also, the use of excess capacity can be costly if the capacity has alternative uses now. Lastly, the costs and benefits that might arise elsewhere in the company are relevant as well. In evaluating the new project, the Direct costing basis is inappropriate because it ignores these potential costs and benefits, while the full costing basis includes some of the costs and benefits regardless of the
Therefore, the three different approaches to estimate Energy Gel costs and benefits are incorrect in at least some instances. The cash flow and with-without principle tell us that one should only be interested in the movement of cash when making capital expenditures. Also, any cash flows caused by an investment are relevant to a decision. Therefore, in the absence of strong competition, any lost profits due to cannibalization can be relevant. Also, the use of excess capacity can be costly if the capacity has alternative uses now. Lastly, the costs and benefits that might arise elsewhere in the company are relevant as well. In evaluating the new project, the Direct costing basis is inappropriate because it ignores these potential costs and benefits, while the full costing basis includes some of the costs and benefits regardless of the