Ashley Marolf, Kendall McTier, and Julia Baukina

Case Study Analysis: Fit Food Inc.

Synopsis:

Fit Food Inc. was founded in 1972 by a man named Sean Wright. The company all started

because Sean started a new line of cookies called “Smart Cookies” in his spare time. These

cookies were low in calories and fat; therefore, he was able to advertise them as being a more

nutritious alternative. By 2000, the Smart Cookies were placed in supermarket chains and were

distributed nationally. Sean continued to develop new products and he even listed the company’s

stock on NASDAQ. In 2001, Sean began a Savory Snacks Division which consisted of various

snack products. Sean acquired an energy drink company in 2003, this became the Sports and

Energy Drinks division of Fit Food Inc. As time progressed, the company continued to expand.

Fit Foods Inc. was a medium-sized food company by 2009 generating revenues that approached

$500 million. Although the company was extremely profitable, it is crucial to understand that

they were also deeply leveraged.

Fit Food Inc. had three major divisions that all reported directly to Sean. These divisions

included Cookies and Crackers, Savory Snacks, and Sports and Energy Drinks. The individual

divisions all obtained their own various departments along with a controller. However, Fit Food

Inc. did not have an internal auditing function, as they outsourced the documentation and testing

work.

Key Issues:

There are many obvious issues in this case; however, these issues are the result of loose

managerial controls, skewed incentives, and pressures from management. Fit Food Inc. uses

result controls in order to meet its objectives; the employees are rewarded with incentives for

reaching the target objectives; yet, some of those goals were simply unattainable. The Sports &

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 Energy Drink and the Cookie and Cracker division were both pressured by management reach

sales targets by increasing annual revenue and profits. Setting strict sales targets pressured the

divisional managers to take extreme measures to reach those goals.

The Problems:

Fit Food Inc. faces countless issues within their organization, some of which include:

1.) When Jack Masters (the president of the Sports & Energy Drink Division) declared a

shipping moratorium at the end of the year, which shifted some sales that would normally

have been recorded in 2007 into 2008. Doing this caused scheduling problems, with

furloughing at the end of the year and overtime at the beginning of the next year. This is

also creates a major accounting implication.

2.) The creation of the “early order program” of the Sports & Energy Drink division was

a major issue. This allowed customers discounts if they placed orders before the year end.

The customers who participated did not have to pay interest on their orders for 120 days,

this was far longer than their usual 30 day terms.

3.) Jack decided to liquidate the accounting reserves in order for the division to hit its

AOP profit target. At the end of the year, the reserves were reduced by $1.7 million.

4.) The Cookie Division management missed the fact that customer’s perceptions of

being “healthy” changed over the years from low calorie and low fat to using more

wholesome ingredients such as whole grains and natural anti-oxidants.

5.) The president of the Cookie Division Scott Hoyt, was resistant to change and did not

have extensive knowledge in terms of accounting and finance.

6.) Sean’s denial of Catherine Elliot’s request of increasing the Cookie Division’s

advertising and new product development budgets in order to reach the 7% growth rate.

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 7.) The Cookie Division giving discounts and payment term extensions, similar to the

Sports & Energy Drink Division.

8.) The sales department of the Cookie Division shipping as much product as possible

before the quarter ended in order for sales to be booked. In the final hours of the first

quarter trucks were loaded with cookies and the trucks drove a few blocks and parked,

this counted as the product being shipped.

9.) The Cookie Division shipping additional unordered products to customers by

“accident” and trying to get those products “stick” with discounted pricing, exchanges,

and flexible credit terms.

10.) Pressuring the accountants to make accounting entries that were immaterial and

lacked supporting information.

Alternative Solutions:

Make modifications to the current controls.

 Tighten the personnel controls in order to make corrections for employees who

are acting unethically (especially the division managers).

 Obtain a tighter personnel control during the hiring process emphasizing on hiring

a person with good values and integrity.

Create a new incentive plan.

 The new incentive plan should not pressure management to make extreme

organizational changes in order to meet the sales target.

 The targets should be more realistic and attainable.

Enforce fair reporting and management practices.

 Hire an internal audit function to overlook all departments.

 Terminate employees who deviate from the correct procedures.

Hold employees and managers accountable for their actions.

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  Employees (managers) who behave in unethical manners should be punished or

terminated from their position if necessary. Managers should never try to get

creative in order to increase revenues and profits.

Hire qualified employees throughout the organization (especially managers).

 Managers should have extensive knowledge in marketing and sales, as well as an

understanding of finance and accounting.

Selected Solution/ Positive and Negative Results:

The selected solution would be a combination of some of the alternative solutions that

were just mentioned. The most important selected solution would be that all management

practices and financial reporting is accurate and fair. An internal audit function should be hired in

order to look over all departments of Fit Food Inc. This would result in more accurate reporting.

A negative result of this would be the additional cost of hiring the personnel necessary. There

needs to be a new incentive plan that is more attainable, doing so will reduce the risk of

management getting creative to reach target goals. A negative result of this could be that

employees will not put forth as much effort to reach set goals. Finally, employees should be

punished and or terminated from their positions when they act unethically. This will tighten

controls, and encourage employees to be more ethical. A negative result could occur if an

employee was terminated, because another employee would have to be hired and trained, which

can be costly and time consuming.

Work Cited

Merchant, Kenneth A., and Wim A. Van Der Stede. Management Control Systems. Third ed.

Harlow, England, London, New York, Boston, San Francisco, Toronto: Pearson, 2012.

Print.

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