Pepsi Bottling Group and Coca Cola Enterprises Harvard Case Solution & Analysis

Pepsi Bottling Group and Coca Cola Enterprises Case Study Solution

  1. Repeat questions 1 and 2 for CCE.  Allocate the reduction in depreciation expense in the same proportion as PBG reported for the first quarter.  For purposes of answering question #2, ignore construction in progress.

Gross Profit Margin and Operating Profit Margin

The gross profit margin of Coca Cola Enterprise Incorporation has increased slightly in the year 2000 in comparison with the year 1999 and the operating profit margin has inclined more than one percent in the year 2000 in comparison with the previous year. If the CCE had not changed their depreciation policy, the gross profit margin would remain same because depreciation does not affect the gross profit of the company where as the operating profit margin of the company could decrease if the company had not apply the change in depreciation policy.

Reduction in Depreciation Expense

The allocation of depreciation expense for first year after the implementation of change in useful life had reduced by $48.79 million. The reason for this reduction in depreciation expense was due to the fact that estimated life of the fixed assets had been increased which led the depreciation expense of that particular equipment to decrease which overall decrease the accumulated depreciation for the year. Therefore, the depreciation expense of the first quarter had decreased which can be seen from the table mentioned below.

Reduction in first quarterBefore change estimated useful lifeAfter change estimated useful life
Building and improvement          112.88            90.30
Manufacturing equipment          218.60          145.73
Machinery and equipment          349.00          249.29
          680.48          485.32
 Quarterly depreciation          170.12          121.33
 Reduction in first quarter            48.79

Depreciation Expense as the Percentage of Fixed Assets of CCE

If the depreciation policy by the Coca Cola Enterprise Incorporation had not changed, the depreciation expense as a percentage of fixed assets would be higher in comparison with the change policy i.e. increase in estimated life of the fixed assets which reduced the depreciation expense for the company. Hence, the depreciation expense as the percentage of fixed assets are mentioned in the table below.

Before change estimated useful lifeAfter change estimated useful life
Building and improvement          112.88            90.30
Manufacturing equipment          218.60          145.73
Machinery and equipment          349.00          249.29
 Depreciation expense          680.48          485.32
 Fixed assets value      4,979.00      4,789.00
 Dep. Expense as % of Fixed assets13.67%10.13%

 

  1. Estimate whether Pepsi had a gain or loss on the sale of its property plant and equipment that it sold in fiscal year 2000.  Note, for purposes of this question you can assume that all changes related to property, plant and equipment are operating related (meaning there are no non-articulating items – non M&As, divestitures, etc.).

Estimation of Gain on Sales of PPE

Estimation of Gain or Loss on sales of PPE  In millions
 PPE of 2000             2,358.00
 depreciation expense                 653.70
             3,011.70
 CAPEX               (515.00)
 PPE of 2000             2,496.70
 PPE of 1999             2,218.00
 Net Book Value               (278.70)
 Sales Proceed                      9.00
 Gain on Sales / Valuation Gain                  287.70
  1. Which company, in your opinion, has more transparent financial statements? Comment on the earnings quality of each of those firms.

Transparency in Financial Statements

The financial statement of Pepsi Bottling Group appears to be more transparent because of their accounting policy which provides an information that the company records the property plant and equipment at cost and the impairment loss is determined through the change in value of the property, plant and equipment reported in the balance sheet whereas there is no information of impairment loss provided by Coca Cola Enterprise. Therefore, based on this information PBG is considered to have more transparent financial statements in comparison with CCE

Earnings Quality

The earnings quality of Coca Cola Enterprise appears to be better in comparison with Pepsi Bottling group due to the fact that coca cola had maintained positive earnings from 1998 to 2000 whereas the PBG had shown negative earnings in 2008. Hence, to identify the quality earnings consistency in earning are considered which is shown by CCE. Therefore, CCE earning appears to be of more quality than the PBG..........

 

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