Bergsson’s Case by Hadially Hasan, Eyram Bakah, Clara
Agbeduamenu and Sarah Mrabet
1. What is your recommendation regarding the 103 product line? Conduct some financial
analysis to support your recommendation.
We recommend that Bergsson continue production of Product Line 103. Currently, Product 103
successfully offsets all of its variable costs and partially covers some of its (sunk) fixed costs.
Total Variable Costs = 1160 , Current Sales = 2160 , Contribution Margin = 1000
The firm should also look for opportunities to increase Sales Volume of Product Line 103 which
will help generate higher contribution margins helping potentially cover fixed costs and lead to
profitability.
This recommendation also considers the strategic importance of Product Line 103 in Bergsson's
portfolio. It plays a crucial role in maintaining market diversification and customer engagement.
The discontinuation of this line could potentially lead to a loss of market share and negatively
impact customer perceptions of Bergsson Best's brand.
2. What would happen to financial results in the short-run if this product were deleted?
Product Line 103 generates positive contribution margin of $1,000,000 to cover some of
Bergsson Best’s fixed costs. If production of Product Line 103 is ceased in the short run the
firm's gross profit would decrease from $2.46 million to $1.46 million, translating into a
decrease in the current profit before tax of $153,000 into a loss before tax of $847,000.
However, if the new available capacity is used to produce and sell 101, the profit loss can be
minimized. Producing an extra 1600 unit of 101 will help generate an extra 940 gross margin
covering the 847 and leading to 93 in total profit before tax.
3. Estimate a break-even point by product line.
Break Even Analysis
Product 101 Product 102 Product 103 Cost Type
Per Unit Per Unit Per Unit
Sales 1.2 1.25 1.35
Direct Material 0.298 0.293 0.32 Variable
Direct Labor 0.309 0.372 0.38 Variable
Utilities 0.005 0.012 0.019 Variable
Maintenance 0.004 0.007 0.006 Variable
Variable Cost 0.616 0.684 0.725
Contribution margin 0.584 0.566 0.625
Product 101 Product 102 Product 103 Total
Fixed Costs $ '000 $ '000 $ '000 $ '000
Rent/Leases 186 157 136 479
Depreciation 565 428 408 1,401
Other Factory Costs 140 110 110 360
Selling Expense 584 240 240 1,064
General Admin 430 200 190 820
Interest Expense 131 65 54 250
Research and Devt. 91 46 38 175
Total Fixed Costs 2,127 1,246 1,176 4,549
Break Even Quantities ('000 units) 3,642 2,201 1,882
Assumption:
1. Interest Expense and Research and Development are allocated based on the revenue
generated by each product line.
4. What is your short-run/long-run enthusiasm for the 103 product line?
In the short run, product line 3 should be kept running to help cover some of our fixed costs
(sunk costs) and maintain market share though not profitable.
In the long run, the firm should focus on differentiation to create a niche market for product
line 3. However, if the company is still unable to meet the breakeven volume requirements,
then the product line should be discontinued, before incurring any new fixed costs (ex.
lease/rent renewal, new machinery).
5. At the firm level, if you were a consultant, what strategy recommendations would you have
for Andrea and Jill?
Product 101 Product 102 Product 103 All Products
Current Sales Volume (‘000) 4333 2080 1600 8013
Break Even Qty (‘000) 3642 2201 1882 7725
Operating income margin 11.9% 1.6% -3.9% 5.8%
- The firm generates a low operating margin on 102 and a loss on 103. Just like Product
103, Product 102 may have to be discontinued in the long-run unless there is an
opportunity to grow sales to go beyond break-even point.
- Selling expenses for Product 102 and 103 are low, it is possible that increasing marketing
expenses could help increase the volume of those two products. The firm can also
explore improving the recipe.
- From a cost perspective, direct material for Product 103 are 10% higher than the two
other products, I suggest that Jill and Andrea scrutinize current suppliers agreement for
potential renegotiations and savings.
- They can also monitor competitor pricing and consider adjusting price points to increase
volumes.
- They should investigate opportunities in e-commerce/online sales channels.
6. Can Bergsson’s Best benefit from grocery shopping transitioning to being more online based?
Yes. Moving to online based sales is a great opportunity for Bergsson’s Best to benefit from a
changing consumer trends and help improve profitability by increasing revenue and reducing
costs:
- Online sales lead to increased sales volume through broader market reach, resulting in
increased total revenue and the ability to negotiate direct materials better.
- There could be a reduction in physical selling expenses but an increase in digital
marketing that is generally more cost-effective.
- Better stock management through real-time insights (in contrast to physical stores),
resulting in reduced handling costs.
7. How can Bergsson’s Best compete against large competitors such as Yoplait and Chobani?
To compete with large players like Yoplait and Chobani, Bergsson's could;
- Focus on its premium, all-natural ingredients and hormone-free qualities as a
differentiation.
- They can position around health-conscious consumers willing to pay more for quality.
- They can partner with health influencers, health clubs and gyms.
- Expanding online sales also helps level the playing field.
