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Static and Flexible Budgets

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$4\mathrm{.}2$ Fudge Delights Inc. Contributed by

Mary M$.$ Oxner PhD$,$ CA$,$ CFA

Associate Professor, Gerald Schwartz School of Business, St$.$ Francis Xavier University, Antigonish

Sarah Cameron has loved confections her whole life and as a young girl learned how to make peanut brittle, fudge, and toffee from her grandmother. Sarah has continued the candymaking tradition in her family throughout her life and made fudge at Christmas and other holidays for friends and family and also sold fudge at craft shows and bazaars. Several years ago, Sarah explored the idea of making and sell$-$ ing her own brand of confections on a commercial basis. When the opportunity arose and her business plan allowed, Sarah opened a candy store, Fudge Delights Inc., in which she sells a variety of candies and confections, many of which remind customers of candy they had as kids. In addition to the candy that she buys from suppliers, Sarah makes different flavours of fudge for sale in her store. Because fudge has a rea$-$ sonable shelf life, Sarah can make it in large batches weeks ahead of the time anticipated for sale. Sarah's favourite flavours include classic maple, chocolate chip chocolate, maple walnut, cherries and cream, chocolate mint julep, lemon drop, and toffee almond. From Sarah's perspective, the variety and number of flavours is as large as one's imagination. Sarah's confectionary store has earned a great reputation for premium confections and high$-$quality fudge, resulting in a $50\%$ increase in sales year over year for the last four years.

There are many ways to make fudge. Sarah uses the same basic technique for all the varieties. To make the fudge, she cooks a sugar syrup to the soft$-$ball stage, lets it cool for a specified amount of time, and then agitates it until crystals form that are smaller than the original sugar crystals; the agitation is primarily what gives fudge its creamy texture. Sarah does not vary the approach to making fudge but does vary the ingredi$-$ ents to create the different flavours. Currently Sarah does not make custom flavours for customers but might consider doing so in the future if time and demand allow. The fudge is sold in $\frac{1}{2}-lb.$ and $1-lb.$ slabs at a price of $$7\mathrm{.}00$ per $\frac{1}{2}lb.$ or $$12\mathrm{.}00$ for $1lb.$ regardless of the flavour of fudge. $($Homemade fudge is typically sold by the pound in Canada.$)$

In Sarah's previous job with a large international soap maker, she learned the need for refined cost infor$-$ mation to make good decisions about pricing and profitability analyses of various product lines. Several years ago when Sarah set up her business, she adopted a job$-$order system for costing the various kinds of fudge. Sarah has been quite diligent about keeping very detailed records for each batch of fudge. Sarah processes all the fudge on$-$site in small batches by flavour. For each batch, Sarah collects information on the amount of butter, sugar, milk, and other ingredients like chocolate, walnuts, vanilla extract, hazelnuts, and peanut butter. The basic fudge recipe and process is exactly the same for the various flavours of fudge except at the end, when different ingredients are added. The information on each batch is eventually recorded and stored on an electronic index card. The information allows Sarah to best understand the difference in the cost of each batch of fudge. Although the cost information does not affect the selling price of the fudge $($because the store policy is to price all fudge at the same price$),$ it does allow Sarah to know which flavours are more costly$.$ Ultimately, this information could result in a flavour being dropped from her product line or sold at a premium price.

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