This activity uses information included in the following D2L Module #1 resources:
• Web Page: Major chocolate brands fail to address child labor, sustainability in their supply chains
• Video: Cross Over Analysis Example
After you have reviewed the above content, complete the following.
The time is September of 2020. Mars Inc. is concerned about the imminent Cocoa Cartel scheduled to be in force in October of 2020. The cartel will add a premium of $400 to the cocoa price per tonne. While Mars supports the initiative on the surface for the potential positive effects on the three affected countries’ cocoa farms, they are concerned about the cost impact on their supply chain.
You need to analyze the impact of the Cocoa Cartel premium. You determine that you need to perform a cross-over analysis based on the proposed premium and sourcing cocoa from non-cartel countries. For this analysis, assume that the cocoa supply outside of the cartel will be enough to accommodate your demand.
Cocoa price per tonne (Variable Costs): find today’s spot price of cocoa per tonne. Use the following website to determine the US$/tonne of cocoa: https://www.nasdaq.com/market-activity/commodities/cj:nmx. The price quoted on this website will be the US dollar price per tonne.
This price is the variable price per tonne of cocoa without any price premium. The new cartel price will be $400 + the current price.
Fixed Costs: The fixed costs specifically allocated to cocoa production from Cocoa Cartel countries are currently $15,000,000 ($15 million). Suppose Mars is to change their production to use cocoa from different countries outside of the cartel. In that case, cocoa production’s fixed costs will rise to $18,500,000 ($18.5 million) to invest in new processes to accommodate the different cocoa sources and retain the same quality.
Cocoa Utilization: Mars uses 430,000 tonnes of cocoa on an annual basis
Step #1 – Set up an Excel spreadsheet to calculate the cross-over point in cocoa tonnes’. Calculate the exact cross-over point in tonnes of cocoa and dollars where each option’s total costs are equal. (Hint – the video in D2L provides an example).
Step #2 – Create a cross-over graph to visualize the analysis. Be sure your chart has a title, x-axis title, y-axis title, and a legend. You should have the following data series (all four graphed):
• Non-cartel: Fixed Costs
• Non-cartel: Total Costs
• Cartel: Fixed Costs
• Cartel: Total Costs
Step #3 – Analyze your cross-over point and the volume in tonnes of cocoa that Mars will need to use to make the cost for either scenario the same. Calculate the total cost at this cross-over point, where the total cost for either scenario is the same. Be sure both of these numbers are included in your Excel document.
Step #4 – Answer the following questions:
Determine whether Mars should consider changing cocoa suppliers to countries outside of the Cocoa Cartel. (i.e., does Mars use enough cocoa to offset the increased fixed costs with sourcing cocoa from other countries)? What other factors should Mars take into account outside of the financial aspects calculated in this case?