Case 1 : CHOCOLATIER Ltd.

The company is a well-established producer and marketer of the finest boxed

chocolates, started ten years ago by two partners, Miguel Dizon and Raul Gomez. Prior
to their partnership, Dizon was a marketing vice-president and Gomez was a comptroller
in a candy company with a national distribution. The two men agreed at the onset that
Dizon would handle distribution and marketing while Gomez would look after
production, accounting, and company finances. Overall planning and major decisions
would be agreed upon by both.
The partners decided to position the company product in the medium-high price
range. They were successful in developing and selling quality chocolates and enjoyed an
edge over their competition. Their single manufacturing plant served a densely populated
market. With increasing customer acceptance, 20 retail outlets were opened. Until
recently, growth seemed limited only by financial resources. In the past months,
however, each partner unearthed information that raised concern to both. In reviewing
costs, Gomez discovered that production costs per pound of candy were rising with each
new retail outlet opened. He realized that the company has outgrown the production
expertise of the present management staff.
Dizons revelation was even more disturbing. He noted that sales had begun to
drop off in several of the stores. He found that in each instance, an aggressive competitor
with a lower-priced line had moved into their territory. When he met with Gomez, Dizon
observed, People cant taste quality anymore. I feel strongly that we should develop a
cheaper line as quickly as possible, to sell for around half our present price. We should
cut our production of the premium line to half its present rate and use the extra cocoa
beans for our new line. Gomez agreed to look into recipes, costs, and schedules.
A week later, Gomez met with Dizon again, this time to report his findings. Our
kitchen has developed two recipes that we can make at a lower price. We think each
recipe will satisfy the public, but neither comes near our premium line in terms of quality.
We have names to suggest for each new formulation: Chocodant and Chocomer. The
only new equipment we will need is a mixer and a molder, and I have located both,
available on a lease agreement with immediate delivery. I have put some costs together,
that include the leasing arrangement, new boxes, and all other expected production
expenses. I have put this information, schedule, etc., on this memo, which you can look
over before we decide. However, I think it is only fair to tell you that I have done some
pencil pushing and I dont think this lower priced line makes for good business. You will
see that every 100 pounds of the premium line now yields P86.00 in contribution, while
Chocodant will yield only P63.00 and Chocomer P54.00. We are strapped financially,
and our cocoa bean suppliers will not increase their shipments to us by more than 10%
because of greater demands and level supply. Finally, I question whether we should go
to an inferior candy that might destroy our quality image. Are you sure we can sell
candy to our customers at these prices?

Dizon looked over the memo and then replied, I would like to study this
information for the next few days. The prices that you have here arent geared to
marketing and will have to be adjusted up or down by a few centavos, but I will accept
them as they are for my thinking. In reply to your last question, let me say that we not
only can sell all the candy we can make at these prices, but we are in for trouble if these
new lines dont make financial sense. The partners agreed to meet again in a few days
to make a decision.
Memo to:
From:
Re:

Mr. Miguel Dizon

Mr. Raul Gomez
New Product Considerations

1. New Equipment
There is no restriction on how the mixer and molder can be used, except that
only one or the other product can be on the mixer at one time, and the same
applies to the molder. Thus, Chocodant can be on mixing while Chocomer is
in molding. The reverse is also true. Both products require these two
manufacturing stages and they must share time on the equipment. The
mixing machine can process 500 pounds of Chocodant daily or 300 pounds of
Chocomer. The molding machine, on the other hand, can process 271 pounds
of Chocodant daily or 633 pounds of Chocomer.
2. Cost and Pricing
Production costs (exclusive of cost of cocoa beans):
Premium line:
P50.00 per 100 lbs.
Chocodant:
P12.00 per 100 lbs.
Chocomer:
P11.00 per 100 lbs.
The cost of cocoa beans as presently carried on the books is P19.00 per
100 lbs. In the past, the cost has ranged from P15.00 to P25.00 per 100 lbs.
Cocoa bean requirements:
Premium line:
Chocodant:
Chocomer:
Projected selling price:
Premium line:
Chocodant:
Chocomer:

1 lb. of candy, 6 lbs. beans (present allocation,

2,400 lbs. of beans)
1 lb. of candy, 4 lbs. beans
1 lb. of candy, 3 lbs. beans
P2.50/lb. (present price)
P1.51/lb.
P1.22/lb.