Dolci Inc.

Background and History

On two different voyages during 1921 and 1922, Salvatore (Sal) Leone and Anna Ragusa left their native Sicily and set sail for a new life in the United States of America. Upon their arrival and processing through immigration at Ellis Island New York, they departed via train to Chicago. They did not know each other as they were from different villages; Sal from Ventimiglia and Anna from Ragusa. Upon arrival via train in Chicago, both Sal and Anna, like thousands of immigrants during that period, prayed that the family that sponsored their immigration would be there to greet them.

Immigrants during that time settled in neighborhoods defined by ethnic backgrounds and Sal and Anna were no different. Their daily lives were defined by the work they could get, preservation of their ethnic customs and rituals and religious observations. Sal and Anna settled with their sponsor families in the heart of what is now known as “Little Italy” in Chicago, the area bounded by Ashland Avenue on the west and Interstate 90/94 on the east, the Eisenhower Expressway on the north and Roosevelt to the south. At the August celebration of Festa Italiana, Sal and Anna were introduced and as they say, the rest was history. 

Like the immigrants during that period, Anna and Sal were not strangers to hard work and long hours. While Sal worked in various construction jobs as a cement mason, Anna was home with the growing family. Anna began selling her specialty baked goods to help make ends meet. Before long, Anna’s reputation for delicious baked goods spread far and wide, so much so, that Sal no longer worked as a cement mason, but began delivering her baked delicacies using an old truck.

Italian cookery became one of the most popular ethnic cuisines in America, spawning many successful bakeries and restaurants—some of which prospered for generations and continue to influence the Chicago dining scene today. By 1927, Italians owned 500 grocery stores, 257 restaurants, 240 pastry shops, and numerous other food related businesses that were concentrated in the Italian neighborhoods.

Growth: 1940-Present

What began in Anna and Sal’s kitchen, soon developed into a full-scale enterprise. The company is now a Chicago-metro favorite, creating four distinct product lines: over-the counter cakes and pastries, custom cakes, restaurant sales and frozen food for grocery store distribution.

Over the Counter Cakes and Pastries These baked goods are ready to eat and are sold from a storefront near the corner of Taylor and Racine. Items sold from this location are delivered from the production facility. Some of the items sold are cannoli, sfingi, zeppole, made-to-order cakes, amaretti, and pizzelles. On the Feast of St. Joseph, customers wait in long lines for sfingi and zeppole and the Chicago Police Department is on hand to direct traffic and maintain order.

Custom Cakes Inspired by the TLC show “Cake Boss” and fueled by the hospitality industry in and around the city of Chicago, the custom cakes segment of Dolci provides elaborate made-to-order, large-scale custom cakes. Some of the more notable cakes created by the cake artists have been a full-sized Ferrari for the opening of the Chicago Auto Show and an outdoor vignette for the Chicago Boat, RV and Sail Show. These custom creations are delivered by Dolci’s cake artists and assembled on site.

Restaurant Sales The restaurant sales division provides ready-to-eat cakes, pies and cookies to various upscale restaurants in the Chicago metro area. These desserts are distributed via a fleet of temperature-controlled vehicles from the motor pool.

Frozen Food The Frozen Food division creates various pies, cakes, pie and cookie doughs to national chains that have a local presence, such as Jewel, as well as independent grocers such as Caputo’s. These products are delivered via a fleet of temperature-controlled vehicles from the central motor pool.

Operations

Dolci, Inc. is a privately held corporation. Ownership of the shares was initially held by Sal and Anna. Upon their death, ownership of the shares passed to their only son, Tony. Tony’s advancing age and the corporate transition plan indicates that each of the company’s divisions are managed by the four children:

Sophia: Over the Counter

 John-Anthony: Custom Cakes

 Adriana: Restaurant Sales

 Lucian: Frozen Food

Previously, the financial results for the company were aggregated, since all residual profits were allocated to the sole shareholder, Tony. As ownership of the shares transitions to the four children and the compensation plans change, a different measurement of profit-center profitability is needed.

At the board meeting, discussion ensued regarding measuring profit-center profitability. The controller, Nick Thomas, a recent graduate of the University of St. Francis’ MBA program, suggested there are at least two ways of measuring profit-center profitability.

1) Indirect common costs can be allocated to the divisions based upon direct labor hours

or

2) Indirect common costs can be measured based upon multiple cost drivers using activitybased costing.

The four division heads were confused and suspicious regarding these “allocation” methods but agreed to review the results of Thomas’ work.

The manufacture of all Dolci products are housed in a single location, a 30,000 square foot facility which has easy access to all major highways. The various product lines require distinctly different processes and equipment, so they occupy specific areas of the facility. The production of the over-the-counter product lines, restaurant sales and frozen food is staffed by individuals having skill levels ranging from laborer to culinary arts graduates. The custom cakes division is staffed by individuals ranging from culinary arts trained individuals to art majors specializing in sculpture.

The salaries for the profit center managers are $1 million to each of the four children.

Tasked with the job of preparing two analyses of financial information based upon product lines, Nick Thomas quickly went to work. The initial Income Statement was used as a baseline for purposes of comparing the two methods. The initial information is shown in Exhibit 1.

Additional data regarding the cost pools and cost drivers are provided in the following exhibits:

Exhibit 2: PRODUCTION STAFF (Hours)

Exhibit 3: GENERAL OVERHEAD RESOURCE COST POOL

Exhibit 4: GENERAL OVERHEAD COST DRIVER

Exhibit 5: PRODUCTION STAFF

Exhibit 6: DELIVERY (Mileage)

REQUIRED

1) Prepare the revised set of cost estimates and profit-center Income Statements using the DirectLabor Hour approach, Method 1 allocation.

2) Prepare the revised set of cost estimates and profit-center Income Statements using the Multiple Cost Driver / Activity-Based Costing approach, Method 2 allocation.

3) Analyze the newly produced information and assess its implications for the managers.

a. What decisions might managers make with this new information?

b. What management action, if any, would you suggest? 

Prepare your case response using the five steps of strategic decision making. Only steps one through four are relevant since time-series data is not available.

exhibit-list-for-dolci