The play takes place during the 1885 Serbo-Bulgarian War. Its heroine, Raina Petkoff, is a young Bulgarian woman engaged to Sergius Saranoff, one of the heroes of that war, whom she idolizes. On the night after the Battle of Slivnitza, a Swiss mercenary soldier in the Serbian army, Captain Bluntschli, climbs in through her bedroom balcony window and threatens to shoot Raina if she gives the alarm. When Russian and Bulgarian troops burst in to search the house for him, Raina hides him so that he won't be killed. He asks her to remember that "nine soldiers out of ten are born fools." In a conversation after the soldiers have left, Bluntschli's pragmatic and cynical attitude towards war and soldiering shocks the idealistic Raina, especially after he admits that he uses his ammunition pouches to carry chocolates rather than cartridges for his pistol. When the search dies down, Raina and her mother Catherine sneak Bluntschli out of the house, disguised in one of Raina's father's old coats.
The war ends, and the Bulgarians and Serbians sign a peace treaty. Raina's father (Major Paul Petkoff) and Sergius both return home. Raina begins to find Sergius both foolhardy and tiresome, but she hides it. Sergius also finds Raina's romantic ideals tiresome, and flirts with Raina's insolent servant girl Louka (a soubrette role), who is engaged to Nicola, the Petkoffs' manservant. Bluntschli unexpectedly returns so that he can give back the old coat, but also so that he can see Raina. Raina and Catherine are shocked, especially when Major Petkoff and Sergius reveal that they have met Bluntschli before and invite him to stay for lunch (and to help them figure out how to send the troops home).
Left alone with Bluntschli, Raina realizes that he sees through her romantic posturing, but that he respects her as a woman, as Sergius does not. She reveals that she left a photograph of herself in the pocket of the coat, inscribed "To my chocolate-cream soldier", but Bluntschli says that he didn't find it and that it must still be in the coat pocket. Bluntschli gets a telegram informing him of his father's death: he must now take over the family business, several luxury hotels in Switzerland.
Louka tells Sergius that Raina protected Bluntschli when he burst into her room and that Raina is really in love with him. Sergius challenges Bluntschli to a duel, but Bluntschli avoids fighting and Sergius and Raina break off their engagement, with some relief on both sides. Major Petkoff discovers the photograph in the pocket of his old coat; Raina and Bluntschli try to remove it before he finds it again, but Petkoff is determined to learn the truth and claims that the "chocolate-cream soldier" is Sergius. After Bluntschli reveals the whole story to Major Petkoff, Sergius proposes marriage to Louka (to Major Petkoff and Catherine's horror); Nicola quietly and gallantly lets Sergius have her, and Bluntschli, recognising Nicola's dedication and ability, offers him a job as hotel manager.
While Raina is now unattached, Bluntschli protests that—being 34 and believing she is 17—he is too old for her. On learning that she is actually 23, he immediately proposes marriage and proves his wealth and position by listing his inheritance from the telegram. Raina, realizing the hollowness of her romantic ideals, protests that she would prefer her poor "chocolate-cream soldier" to this wealthy businessman. Bluntschli says that he is still the same person, and the play ends with Raina proclaiming her love for him and Bluntschli, with Swiss precision, both clears up the major's troop movement problems and informs everyone that he will return to be married to Raina exactly two weeks from that day.
