General Foods Corporation Case

In March 1967, Crosby Sanberg, manager-financial analysis at General Foods Corporation, told a

casewriter, "What I learned about incremental analysis at the Business School doesn't always work."

He was convinced that under some circumstances sunk costs were relevant to capital project

evaluations. He was also concerned that financial and accounting systems did not provide an

accurate estimate of incremental costs and revenues, and that this was one of the most difficult

problems in measuring the value of capital investment proposals. Sanberg used the Super project1 as

an example.

Super was a new instant dessert, based on a flavored, water-soluble, agglomerated2 powder.

Although four flavors would be offered, it was estimated that chocolate would account for 80% of

total sales.

General Foods was organized along product lines in the United States, with foreign operations

under a separate division. Major U.S. product divisions included Post, Kool-Aid, Maxwell House,

Jell-O, and Birds Eye. Financial data for General Foods are given in Exhibits 1, 2, and 3.

The $200,000 capital investment project request for Super involved $80,000 for building

modifications and $120,000 for machinery and equipment. Modifications would be made to an

existing building, where Jell-O was manufactured. Since available capacity of a Jell-O agglomerator

would be used in the manufacture of Super, no cost for the key machine was included in the project.

The $120,000 machinery and equipment item represented packaging machinery.