The factory is experiencing a bottleneck and is trying to determine which cake i

Question

The factory is experiencing a bottleneck and is trying to determine which cake is more profitable. Even though the company may have to limit the orders that it takes, Eastwood is concerned about customer service and satisfaction. Chocolate Cake Birthday Cake Specialty Cake Sales price $20.00 $45.00 $60.00 Variable cost per cake $5.00 $12.00 $20.00 Hours needed to bake, frost, and decorate 1 hour 2.5 hours 2 hours (a) Calculate the contribution margin per hour per cake. (b) Determine which cakes the company should try to sell more of first, second, and then last.

Explanation / Answer

a. Computation of contribution margin per hour per cake:

b. If labor hours are a constraint, then the company should try to sell more of Specialty cakes first, Chocolate cakes second and Birthday cake last.

Chocolate cake Birthday cake Specialty cake Selling price per cake $ 20 $ 45 $ 60 Variable cost per cake $ 5 $ 12 $ 20 Contribution margin per cake $ 15 $ 33 $ 40 Hours needed 1 2.5 2 Contribution margin per hour per cake $ 15 $ 13.2 $ 20

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