Thor Rasmussen was an accidental entrepreneur. Although his primary job was as a hair stylist, he also had a small side business in making and selling premium, hand-dipped chocolate truffles. His aunt had developed the original recipe for a family member with a severe soy allergy (most commercial chocolate has soy). Thor made several batches as Christmas gifts for friends in 2006. After a friend of a friend tried some of the special truffles, she approached him and asked if she could buy some. Startled, Thor replied I dont know what that looks like; let me get back to you! Over the next several years, he continued to give truffles as presents and sell a few batches by word of mouth.

The truffle business really started to grow when he became a hair stylist at Paradise and his clients began asking for his truffles. By the Christmas season of 2013/2014, the demand for Thors special truffles had grown so much that he really started thinking about running his sideline as a business. While he did not want to give up his career as a stylist, he did enjoy the creativity behind his truffles and the amazed reactions from people who tried them: Thats a lot of happiness in a little box!

Thor asked a client who was a cost accountant to help him analyze his business. His main concern was that he didnt know if he was charging enough for his truffles. He also confessed that he was not good at marketing, or numbers, or record keeping and had really no idea if his truffles were even profitable. As he put it, I assume theyre profitable because I have fewer credit card payments at the end of the month than I had to start with.

Thors truffles were a premium product with several distinguishing features. He used premium chocolate combined with bulk chocolate in both the filling and the coating layers. The inner truffle (fondant) was hand-rolled and cooled extremely slowly, which gave an ultra-creamy texture, and the outer shell was hand-dipped, resulting in a thinner layer which then absorbed more of the flavoring from the inner truffle. The truffles were soy-free, used premium ingredients, and were completely alcohol free2. Thor worried that most people didnt see the huge difference in quality between his truffles and mainstream truffles until they actually tried them.

2 Most flavorings use an alcohol base; as a recovering alcoholic, Thor was committed to seeking out alternatives to using alcohol-based flavoring.

Because he came under the Colorado Cottage Food Act, Thor would be limited to $5,000 in revenue per type of truffle and was also required to deliver the food to the customer personally, but was not required have a commercial kitchen or special licenses. His target market was women between the ages of 35 and 60, or what he called old money. He distinguished this group as being established in their careers, with discretionary funds, and who were tired of giving the usual gift of wine to friends and clients. As he sold only to individuals, the typical order was one to four dozen truffles (50 per cent single variety, 50 per cent assortments), although there were three clients who bought in large (multiple dozens) orders for client gifts. Orders were picked up by customers at his salon, although he would personally deliver for extremely large orders (12 dozen truffles). Every year, 80 to 85 per cent of his business would be repeat customers. Thor characterized new clients as slow to develop: they would try the truffles the first year, make last minute purchases of assortments the second year, but by the third year they tended to start placing large orders for gifts.

Marketing was very minimal. Thor had traded truffles for the development of a website. While the website was adequate for ordering by variety and had spectacular photos, it did not do a good job describing the varieties or explaining why Thors truffles were so special. Thor also printed business cards listing regular varieties, the price per dozen, and his contact information. One business card was included with each box of a dozen truffles and individual sample truffles were served on a card to salon customers. Approximately 20 per cent of his total production was handed out as samples each season to attract customers. Other than word of mouth from enthusiastic customers, there were no other marketing or advertising campaigns.

Sales were highly seasonal: Thor started making truffles in October and finished in January, although he was considering summer production to reach outdoor farmers markets and craft fairs. There were 12 truffles per order (11 oz.), priced at $17.50 plus tax in three basic configurations: (1) a dozen of a single variety, (2) an Assortment selected by Thor himself based on what was left from prior batches and guaranteeing at least 6 flavors, and (3) a self-selected assortment of equal amounts of up to four varieties. Rarely, Thor would sell a half dozen to a customer priced at $9.75 (half the price of a dozen plus $1 pain in the rear tax). All sales were made by cash or credit card and sales tax was 6.55 per cent. Credit card purchases were 90 per cent of Thors sales with bank fees of 2.75 per cent for credit/debit cards.

Developing new flavors was Thors favorite part of the business. There were eleven regular flavors, and each year Thor would create new varieties in October and test them by distributing samples at his salon, Paradise, listening very carefully to the comments and watching expressions closely. Usually, he would test both a dark and a milk chocolate version and then poll customers and co-workers for the winning combination. The 2013/2014 season was unusual because there were three new varieties tested and all three were retained. Thors development record was good: of the 14 tested varieties, only three had failed. The learning curve for new varieties was fairly steep; the first three batches would be inconsistent after which they would be extremely consistent. Thors records were very minimal, but he was able to produce a rough estimate of how many dozens he sold of each variety in the prior year (Table A).

Truffles are a very labor intensive process and require a great deal of cooling time between stages of the process. As a result, for everything but the Sea Salt Caramel (SSCar), Thor would usually make four batches of different varieties at a single time, so there was always one batch to be worked on while another was cooling, although he could make up to eight batches at a time. One batch produced four dozen truffles of the regular varieties or five and a half dozen of the Sea Salt Caramel truffles.

Four batches could be processed in about two to three days with the chilling and resting cycles. However, the actual labor time during the process would be about twelve hours. Long chilling and resting times were critical, as slower cooling times resulted in higher quality and better taste. Ideally, the external temperature should be less than 74 degrees Fahrenheit. If the weather was humid, the time could be increased considerably as it would take longer to properly incorporate the base ingredients. Fortunately, as Thor pointed out, humidity was rarely a problem in Colorado, which is why there were so many chocolate companies based in the state!

For most varieties, the base truffle mix of chocolate, cream, and butter was identical, with flavorings usually added at the beginning of the process. The chocolate itself was a mix of bulk chocolate and either dark or milk premium chocolate. Once the mix was ready, it would be chilled overnight, individually hand rolled the next day, frozen again overnight, dipped (or enrobed) in chocolate, marked with a pattern of colored decorative chocolate icing indicating the variety3, quick frozen, and stored in a commercial freezer. As everything was hand-rolled and the process was very consistent, there was practically no wastage. As Thor explained, there were visual cues if the truffles werent mixed enough or if cooling too fast and he could correct the process immediately.

3 For example, dark chocolate and cherry had a single red dot on top of each truffle, dark chocolate and strawberry balsamic had a cross hatching of red icing, and dark chocolate and vanilla had a squiggle of white icing.

Sea Salt Caramel (SSCar) truffles were different. The process was much more difficult and Thor was still struggling to perfect it. He could get four batches of dark chocolate SSCar truffles in thirteen hours, and each batch produced approximately 66 truffles after wastage. SSCar truffles were layered and sliced, not hand rolled, and there was an extra stage in the process to make the caramel. Making the caramel required an extra hour, including the time to blast chill the layer. Once the caramel layer was added to the chocolate truffle layer and chilled, the resulting mix was turned out on wax paper and sliced into standardized, square truffles. Unfortunately, the slicing process resulted in much more wastage around the edges (around five per cent of the mix). Making the caramel itself was very tricky Thor had a five degree window to cook the caramel mixture or it was ruined and candy thermometers were largely useless due to the altitude. Currently, Thor estimated his success level at 75 per cent. If the caramel had gone bad it was super apparent super fast when he cut into the layered, chilled mixture. Unfortunately, that also meant the entire batch, including the chocolate layer, had to be discarded. Because SSCar truffles were distinctive (square instead of round), Thor did not use colored icing to distinguish the variety.

Currently, Thor was producing all his truffles in his own kitchen. Because this was not a space dedicated only to truffles, he was unable to adequately come up with overhead costs for utilities, rent, or insurance. His equipment was basic and consisted mainly of measuring cups and spoons, 9x11 or 8x10 glass baking pans, spatulas, bowls, a scale, candy tools, a chefs knife, and a cutting board. He hand-mixed all his truffles for quality and the only appliances he used were a stove and an upright commercial freezer loaned by a friend. The only identifiable overhead costs he could come up with were the thousands of little plastic storage boxes he bought each year (estimated at $50 per season) and wax paper (ten rolls per season) used to store the truffles he produced prior to their packaging and sale or distribution as samples.

Thor had used the Internet to research suppliers. He ordered his bulk chocolate three times a year from Supplier A and his premium, European chocolate twice a year from Supplier B. He timed his orders to take advantage of bulk discounts and regular specials. The tissue paper, decorative Chinese take-out boxes, and colored chocolate came from a large retail craft store; flavoring and oils from Supplier C; the Strawberry Balsamic vinegar came from a local specialty shop; and all other ingredients, as well as the plastic storage boxes and wax paper, came from the local big box retailer. During his production season, Thor went to the retailer at least daily (infinity plus one trips), because he had limited storage for perishable ingredients such as cream and butter. All supplies were paid for at time of purchase, using his credit card.

The bulk of his direct materials were the three types of chocolate. Bulk chocolate was $140.00 for 50 lbs., including shipping. The premium chocolate was sold in five kilogram bars and was $109/bar for dark and $80/bar for milk chocolate, including shipping. Other ingredients were flavorings, strawberry balsamic vinegar, cream, butter, sugar, and sea salt (see Table B for individual costs, Table C for the required amount per batch, and Table D for measurement conversions). Each order (one dozen truffles) was packaged in a decorator Chinese takeout box, used one sheet of tissue paper, and included one business card.

By far and away, the biggest part of the cost of the truffles was the labor expense. Thor was estimating labor at $10/hour, or slightly more than local minimum wage of $8/hour, but considerably less than his estimated $20/hour as a stylist. He did not feel $20/hour was a good rate to use for the truffles because they were completely made in his spare time, but he wanted to clear more than minimum wage.

The main question Thor wanted answered was, first of all, was he making money? He needed to know the actual cost of each variety of his truffles and at what price they should be offered. He was reluctant to charge different prices for different varieties, although he did not rule out that possibility. He also wanted advice whether he could afford to replace the bulk chocolate with 100 per cent premium chocolate.

TABLE A: Prior Years Sales per Variety

Variety

Sales

(in dozens)

Sea Salt Caramel

88

Dark & Dark

48

Milk & Milk

48

Dark & Amoretto

16

Dark & Cherry

32

Dark & Raspberry

32

Dark & Mint

16

Dark & Orange

16

Dark & Strawberry Balsamic

32

Dark & Vanilla

32

Milk & Vanilla

32

Total

392

TABLE B: Costs of Ingredients and Materials

Item

Purchase amount

Purchase cost*

Bulk Chocolate

50

lbs.

$140.00

Premium Dark Chocolate

5

kg.

$109.00

Premium Milk Chocolate

5

kg.

$80.00

Cream

1

quart

$3.86

Butter

1

lb.

$3.43

Flavoring (Amoretto, Cherry, Raspberry, Mint, Orange, Vanilla)

1

oz.

$5.50

Strawberry balsamic vinegar

12.7

oz.

$17.95

Sea Salt

17.6

oz.

$2.18

Decorative chocolate**

$2.50

Sugar

10

lbs.

$5.48

Premium Vanilla (only used on SSCar)

2

oz.

$4.75

Corn Syrup

32

oz.

$4.46

Tissue paper

12

sheets

$2.68

Chinese take-out boxes

12

boxes

$9.96

Business cards

1,000

$38.00

Wax Paper

10

rolls

$12.50

Plastic storage boxes

$50.00

*Purchase cost includes shipping, where applicable

**One tube of Decorative chocolate would be enough for 8 batches of regular truffles. There are no data on use of decorative chocolate per truffle or per flavor.

TABLE C: Batch Requirements per Variety (includes wastage)

Basic Fondant

Bulk Chocolate

2

Pounds

Premium Chocolate (either dark or milk)

4

Ounces

Cream

1.25

Cups

Butter

0.75

Cup

Individual Flavors

Flavoring

2

Drams

Strawberry Balsamic Vinegar

1.5

Tablespoons

Caramel

Sea Salt

1

Tablespoons

Corn Syrup

0.5

Cup

Premium Vanilla

3

Tablespoons

Sugar

3

Cups

Cream

0.5

Cup

Butter

0.75

Cup

TABLE D: Measurement Conversions

1 pound (lb.) =

16

ounces (oz)

1 pound (lb.)

2

cups ( C)

1 cup (C) =

8

ounces (oz)

1 ounce (oz.) =

16

drams (approx.)

1 ounce (oz.) =

2

Tablespoons (T.)

1 Tablespoon (T.) =

3

teaspons (t.)

1 quart (qt.) =

4

cups ( C)

1 kilogram (kg) =

1000

grams (g)

1. What should be the cost object for Thors business? Why? Would it be better to analyze Thors costs as prime costs or conversion costs? Why? Classify each of the items in Table B as direct material, overhead, or both.

What should be the cost object for Thors business?

Why?

Would it be better to analyze Thors costs as prime costs or conversion costs?

Why?

Classify each of the items in Table B as direct material, overhead, or both.

TABLE B: Costs of Ingredients and Materials

Item

Purchase amount

Purchase cost*

Bulk Chocolate

50

lbs.

$140.00

Premium Dark Chocolate

5

kg.

$109.00

Premium Milk Chocolate

5

kg.

$80.00

Cream

1

quart

$3.86

Butter

1

lb.

$3.43

Flavoring (Amoretto, Cherry, Raspberry, Mint, Orange, Vanilla)

1

oz.

$5.50

Strawberry balsamic vinegar

12.7

oz.

$17.95

Sea Salt

17.6

oz.

$2.18

Decorative chocolate**

$2.50

Sugar

10

lbs.

$5.48

Premium Vanilla (only used on SSCar)

2

oz.

$4.75

Corn Syrup

32

oz.

$4.46

Tissue paper

12

sheets

$2.68

Chinese take-out boxes

12

boxes

$9.96

Business cards

1,000

$38.00

Wax Paper

10

rolls

$12.50

Plastic storage boxes

$50.00

*Purchase cost includes shipping, where applicable

**One tube of Decorative chocolate would be enough for 8 batches of regular truffles. There are no data on use of decorative chocolate per truffle or per flavor.

2. Table A gives sales in dozens for the prior year. The case indicates that 20 per cent of total production is given away as samples. How would you classify these sample truffles? For the prior year, develop a table that shows (by variety and in total), sales (in dozens), samples (in dozens), total production (in dozens) and total production (in batches).

How would you classify these sample truffles?

Sales and Production Figures

Percentage of production distributed as samples

Percentage of production sold

Dozens produced per batch

Sea Salt Caramel

All others

Variety

Sales

Samples

Total Production

Total Production

Cost per Dozen Sold

CGS

Cost per Promotional Dozen

Promotional Cost

Price per Dozen

Revenue

(in dozens)

(in dozens)

(in dozens)

(in batches)

(in dozens)

(in dozens)

(in dozens)

(in dozens)

(in dozens)

Sea Salt Caramel

88

Dark & Dark

48

Milk & Milk

48

Dark & Amoretto

16

Dark & Cherry

32

Dark & Raspberry

32

Dark & Mint

16

Dark & Orange

16

Dark & Strawberry Balsamic

32

Dark & Vanilla

32

Milk & Vanilla

32

Total

392

Cost Conversions

Item

Purchase amount

Purchase cost*

Relevant Unit

Cost per Relevant Unit

Bulk Chocolate

50

lbs.

lb

Premium Dark Chocolate

5

kg.

oz

Premium Milk Chocolate

5

kg.

oz

Cream

1

quart

cup

Butter

1

lb.

cup

Flavoring (Amoretto, Cherry, Raspberry, Mint, Orange, Vanilla)

1

oz.

dram

Strawberry balsamic vinegar

13

oz.

T

Seasalt

18

oz.

T

Decorative chocolate**

0

batch

Sugar

10

lbs.

cup

Premium Vanilla (only used on SSCar)

2

oz.

T

Corn Syrup

32

oz.

cup

Tissue paper

12

sheets

sheet

Chinese take-out boxes

12

boxes

box

Business cards

1,000

card

Wax Paper

10

rolls

dozens produced

Plastic storage boxes

dozens produced

*Purchase cost includes shipping, where applicable

**One tube of Decorative chocolate would be enough for 8 batches of regular truffles. There are no data on use of decorative chocolate per truffle or per flavor.