Fit Foods Inc Case Study

Chapter 5 – Fit Foods Inc. Case

The objective of Fit Foods Inc was all of its divisions were required meet the annual sales targets by increase annual revenues and profits by at least 5% in order to satisfy its shareholders. The sales targets reflected investor expectations of steady growth. The company’s strategy was outlined in the Annual Operating Plans (AOP) that included new marketing and product developments plans and pro forma income statements and balance sheets. The company is highly dependent on the volume and customer. In order for each division to achieve its sales target, it must increase the amount of customers that would like to purchase Fit Foods Inc’s product. As a result this will directly impact the volume of goods produced.

The three divisions in the company were the Cookies & Crackers Division, Sports & Energy Drinks Division, and Savory Snacks Division. Each of these divisions had its own sales and marketing department, production department, R&D department and a controller. The Savory Snacks Division is achieved high growth rates in 2008 and 2009; therefore the division is performing well. On the contrary, the Cookies & Crackers Division and Sports & Energy Drinks Division are performing poorly. Furthermore, according to Exhibit 1 below, you can see that both divisions are not meeting the annual sales target of 5%.

Sports & Energy Drinks Division has had high performance and achieved AOP profit target in 2003 to 2007. However, the division’s performance was declining in 2008 and 2009. This change in performance was caused by Jack Masters, the CEO of the division implementing questionable courses of actions in order to maintain control of revenues and profits. The first action was the shipping memorandum that allowed some sales that were recorded at the end of 2007 to be moved to the beginning of 2008. This caused scheduling problems, a build up of inventory, potentially customer complaints about shipment delays and product outages. This is a cut off violation and data manipulation deliberately done in order to increase sales in 2008. The second action was the fraudulent build up of accounting reserves against A/R and inventory balances in years 2008 and 2009. This is known as the cookie jar reserve which is very fraudulent method that is used to inflate profit. The third action was to prepay some expenses that would have normally been incurred in 2008. This action was done in order to decrease expenses and increase profit. Another action was implementing the early order program. This program offered customers 5% to 20% in discounts, moderate payments if they placed orders scheduled to be delivered before the year ended, and customers were given 120 days to pay their invoices without interest. This would cause revenue to increase only for a short-term period. At the end of 2008, Mr. Masters’s data manipulation and fraudulent practises back fired and along with the division’s controller, they both colluded to liquidating some of the accounting reserves, where reserves were reduced by $1.7 million in order to meet the AOP profit target. (Discretionary expense – Mountain Lumber, advertising, R&D all to defer these expenses to increase income) (reduces CoGs and inflates profit, AFDA is decreased and bad debt expense would decreased and may becoming recoverable, this would agin inflate profit)