QIII/IV

Barbaras Chocolate Company is a very small scale producer of fine chocolates located in central Connecticut.

Assume the following information about the company:

Barbaras entire annual production takes place over a single weekend in early December, during which a maximum of 3,000 chocolates can be produced and packaged into boxes of thirty chocolates each. For purposes of this problem, assume that all chocolates have identical costs.

Currently, Barbara produces 2,400 chocolates during the weekend. Variable costs consist of chocolate and boxes. The cost of other direct materials (such as peanut butter, oils, nonpareils, etc., are considered insignificant, and thus ignored). All other costs, including facilities, overhead, and labor, are considered fixed costs. Each box can be sold for $4. Ignore taxes throughout the problem.

Cost to produce 2,400 chocolates

Variable Costs 32 pounds of chocolate @ $5/pound $160

80 boxes @ $0.50/box 40

Fixed Costs 200

Total Cost $400

Over the past several years, Barbara has received numerous customer requests for specialized boxes, containing only a single type of chocolate (Barbaras peanut butter cups are especially popular). Barbara is therefore considering offering specialized boxes as a new product line. While the chocolates themselves would be the same as before, they would be packaged in a smaller box, costing $0.20 each. The smaller box would hold twelve chocolates and be sold for $2 per box. Adding the new product line would have no effect on existing costs, including the fixed costs.

If BCC were to produce a mixture of both regular and specialty boxes, what is the smallest number of specialty boxes which would need to be produced in order to break-even? Assume that total production is at the maximum of 3,000 chocolates, and that BCC can sell whatever is produced. (15 points) __________

4. Currently, Barbara pays her only employee a fixed salary of $120 for the weekend. She is considering changing this to a per chocolate piece rate of $0.05/chocolate. Assuming that BCC faces future uncertainty about volume, what would be one advantage and one disadvantage of paying a piece rate, in terms of BCCs future profitability (assume that operationally, this would have no effect). Look at this strictly from the firms perspective. Answer qualitatively and briefly (3-4 sentences). (5 points)