Noccio Chocolate Company: A Case Study in Production Optimization

This case study delves into the production analysis of Noccio Chocolate Company (NCC), founded by Jaan and Ting, focusing on optimizing their chocolate production and blending processes. The analysis covers the determination of total revenue, total costs, and the optimum product mix using linear programming to maximize profit. It addresses key questions posed by Ting, including the number of boxes produced for each product, the cost of wasted cocoa powder, and a comparison between fixed and variable volume agreements. The study also explores the impact of negotiating different pricing models and the potential benefits of acquiring additional Grade A cocoa powder. Sensitivity analysis is conducted to assess the stability of the preferred product mix, culminating in a decision table and recommendations for enhancing NCC's production efficiency and profitability. Desklib provides access to similar case studies and solved assignments for students.

Executive summary
The main founders of Noccio Chocolate Company (NCC) are Jaan and Ting who were former
students of the University of New South Wales (UNSW) student, with the key drive and mission
of blending Chocolate, moreover to mix and fill machine. At the present moment production
analysis done showed that more than 30, 000 kg of the products were produced yearly, the
achievement has resulted from production of quality product at a moderate price.
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Contents
Executive summary.....................................................................................................................................1
Introduction.................................................................................................................................................3
Determination of total revenue...................................................................................................................4
Determination of total cost.........................................................................................................................5
Optimum product mix.................................................................................................................................6
Determination of net profit based on product mix.....................................................................................7
Determination of the constraints................................................................................................................9
Solution to Ting`s questions......................................................................................................................10
Number of boxes produced for each product.........................................................................................10
Cost of wasted cocoa powder................................................................................................................11
Comparison between the current strategy of a fixed volume agreement and variable volume agreement.
...............................................................................................................................................................12
Decision on negotiating a different pricing model.................................................................................13
Decision on additional 800 kg of Grade A powder with similar cost as the initial................................14
Sensitivity of preferred product mix......................................................................................................15
Results.......................................................................................................................................................16
Decision Table:......................................................................................................................................16
Conclusion.................................................................................................................................................17
Recommendation......................................................................................................................................18
Reference...................................................................................................................................................19
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Introduction
The company departments heads carried out analysis on their respective areas in order to come
out with proper and effective results of enhancing production in the company.
Firstly, Jaan a production manager conducted a random sampling as a part of the consignment
whose aims was to determine the quality of beans. The estimation was about 20% of the
consignment which was Grade “A” that is regarded as the best available, what remained was
Grade “B”. The agreed delivered price to the factory is $ 18,000 per tonne of powder. However,
the standard used by Jaan were personal hence it could have never been documented rating
system, moreover, there was on the relationship between Jaan’s rating and the agreed purchase
price per tonne.
Secondly, Ian the sale manager of Noccio determined all the premium bars that Noccio could
have managed to produce. This premium bar was manufactured from the finest powder and
ingredients, essentially, other two products had a limitation on markets..
Finally, Mal finance head prepared a pro-form statement about profit. Where calculation of profit
contribution of each product was done, on its analysis he noted that the chocolate sauce product
hard to make losses that year.
3

Determination of total revenue
The total revenue is determined by multiplying the sales volume in box in the optimum product mix
table by their respective sales revenue in sales cost per unit table.
Optimum Product Mix:
Particulars
Premium
Bars
Chocolate
Sauce
Dark
Couverture
Total
Consumption
Maximum Demand 37777 50000 80000
Sales Volume (in box) 37777 0 80000
Cocoa Powder (kgs/Box) 0.18 0.2 0.25
Total Cocoa Powder Required 6799.86 0 20000 26799.86
Sales & Cost Details per Unit:
Particulars
Premium
Bars
Chocolate
Sauce
Dark
Couverture
Sales Revenue $12 $14 $11
Particulars
Premium
Bars
Chocolate
Sauce
Dark
Couverture TOTAL
Total Sales Revenue $453,324 $0 $912,000 $1,365,324
4

Determination of total cost
The total cost is determined from the addition of the direct labour, variable overhead, variable selling,
Cocoa, packaging and allocated overhead.
Direct Labor $133,731 $0 $129,600 $263,331
Variable Overhead $27,199 $0 $62,400 $89,599
Variable Selling $45,332 $0 $91,200 $136,532
Cocoa $122,397 $0 $360,000 $482,397
Packaging $79,332 $0 $184,800 $264,132
Allocated Overhead $407,992 $0 $828,000 $1,235,992
Total Costs $439,724 $0 $883,200 $1,322,924
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Optimum product mix
The total value of the Cocoa powder required was determined by multiplying the sales volume in boxes
by the kilogram of Cocoa powders in box, and the value of the Cocoa powder required in production of
premium bars were 6799.86, while for the chocolate sauce was 0 and finally for the Dark Couverture
was 20000, therefore the total consumption for all this values was 26799.86
Particulars
Premium
Bars
Chocolate
Sauce
Dark
Couverture
Total
Consumption
Maximum Demand 37777 50000 80000
Sales Volume (in box) 37777 0 80000
Cocoa Powder (kgs/Box) 0.18 0.2 0.25
Total Cocoa Powder Required 6799.86 0 20000 26799.86
6

Determination of net profit based on product mix
Using a linear programing solver the profit of the value $480,000 was determined when the sales
volume of premium bars were 33333, while the sales volume chocolate sauce is 0 and the sales volume
of the dark couverture was 80000.
Objective Cell (Max)
Cell Name Original
Value
Final Value
$E$41 Net Profit TOTAL 40800 40799.88
Variable
Cells
Cell Name Original
Value
Final Value Integer
$B$15 Sales Volume Premium
Bars
33333.33 33333 Integer
$C$15 Sales Volume Chocolate
Sauce
0 0 Integer
$D$15 Sales Volume Dark
Couverture
80000 80000 Integer
Constraints
Cell Name Cell
Value
Formula Status Slack
$B$17 Total Cocoa Powder
Required Premium Bars
5999.94 $B$17<=$B$5 Not
Bindin
g
0.06
$C$17 Total Cocoa Powder
Required Chocolate
Sauce
0 $C$17<=$B$8 Not
Bindin
g
30000
$D$17 Total Cocoa Powder
Required Dark
Couverture
20000 $D$17<=$B$6 Not
Bindin
g
4000
$E$17 Total Cocoa Powder
Required Total
Consumption
25999.94 $E$17<=$B$8 Not
Bindin
g
4000.06
$C$15 Sales Volume Chocolate
Sauce
0 $C$15<=$C$14 Not
Bindin
g
50000
$D$15 Sales Volume Dark
Couverture
80000 $D$15<=$D$14 Bindin
g
0
$B$15:$D$15=Integer
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The net profit determined must be too be equivalent to getting the difference between the total
revenue and the total cost
Net profit = $1,311,996 - $1,271,196 = $40,800
8

Determination of the constraints
Using the linear programing solver the value of the total cocoa powder required in premium bars is
5999.94, while the total cocoa powder required in Chocolate sauce is 0, while the total cocoa powder
required in dark couverture is 2000, while the total Cocoa Powder Required Total Consumption
25999.94 also the sales volume Chocolate Sauce is 0 and finally the sales Volume Dark Couverture is
80000
Constraints
Cell Name Cell
Value
Formula Status Slack
$B$17 Total Cocoa Powder
Required Premium Bars
5999.94 $B$17<=$B$5 Not
Bindin
g
0.06
$C$17 Total Cocoa Powder
Required Chocolate
Sauce
0 $C$17<=$B$8 Not
Bindin
g
30000
$D$17 Total Cocoa Powder
Required Dark
Couverture
20000 $D$17<=$B$6 Not
Bindin
g
4000
$E$17 Total Cocoa Powder
Required Total
Consumption
25999.94 $E$17<=$B$8 Not
Bindin
g
4000.06
$C$15 Sales Volume Chocolate
Sauce
0 $C$15<=$C$14 Not
Bindin
g
50000
$D$15 Sales Volume Dark
Couverture
80000 $D$15<=$D$14 Bindin
g
0
9

Solution to Ting`s questions
Number of boxes produced for each product
When determining the number of boxes that would be produced for each of the product, it was
found that 33333 boxes would be required in order to pack the premium chocolate bars and
80000 boxes would be required in order to pack the dark couverture. In case of packing the
chocolate sauce, there are no boxes required and therefore in an overall manner it is observed
that there is a requirement of 113333 boxes in order to pack all the chocolates and thereafter
offer for sales in the market. The linear program for the same is given below:
Max 12A + 14B + 11C
Where, 0.18A <= 6000 kgs.
0.2B <= 30000 kgs.
0.25C <= 24000 kgs.
0.18A + 0.2B + 0.25C <= 30000 kgs.
10

Cost of wasted cocoa powder
The total amount of cocoa powder that was purchased for the purpose of manufacturing was
30000 units and the overall expense for the same was $540,000. However, it is observed that the
overall consumption of cocoa that was used in order to manufacture the chocolate bars, chocolate
sauce and dark couverture was found to be 25999.94 units. Therefore there has been an
observation that approximately 4000 units of cocoa remains unused and therefore gets wasted
and the cost that was associated with the amount of cocoa was an additional expense. Therefore,
steps and strategies were required to be taken with the help of which the wasted cocoa can be
used or this amount can be reduced as well.
Particulars Unit Amount
Grade A 6000 $108,000
Grade B 24000 $432,000
Total Cocoa Powder (in kgs.) 30000 $540,000
Additional Cocoa (in kgs.) 800
Total Cocoa Powder (in kgs.) 30800 $540,000
Optimum Product Mix:
Particulars
Premium
Bars
Chocolate
Sauce
Dark
Couverture
Total
Consumption
Maximum Demand 37777 50000 80000
Sales Volume (in box) 37777 0 80000
Cocoa Powder (kgs/Box) 0.18 0.2 0.25
Total Cocoa Powder Required 6799.86 0 20000 26799.86
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Comparison between the current strategy of a fixed volume agreement and variable
volume agreement.
Itn accordance to the current strategy which was a fixed volume agreement, there have been
wastage of approximately 4000 units of cocoa for which a certain amount of money was
invested. The maintenance of the fixed volume agreement refers to the fact that in each month
and year the company would be purchasing the same unit of cocoa irrespective of the fact that
whether they are able to optimally make use of the total amount of cocoa purchased. Hence, it is
agreeable that variable volume contract can be taken into consideration. Therefore, it would be
better for the company to shift their intention from the fixed volume agreement to the variable
volume of contract in which the company would be able to purchase the raw material based on
the demand in the market and the amount of production they would undertake. In this manner,
the unit of cocoa can vary according to the demand of the final product and thereby the amount
of wastage can be reduced and the additional cost that was added with the wasted material can be
mitigated. It is even seen that the company would be able to optimally make use of their
resources and in this manner would be able to enhance their operational activities and their
effectiveness in production.
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