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

A. 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. B. 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.