Question

Eastwood Cake Factory sells chocolate cakes, birthday cakes, and specialty cakes. The factory is experiencing a bottleneck and is trying to determine which cake is most profitable. Even though Eastwood may have to limit its orders, it 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

Required:
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.

Answer 1

Answer:

a.

                                                 Chocolate        Birthday        Specialty

                                                     Cake               Cake              Cake

Contribution per hour                 $15 / hour      $13.2 / hour  $20 per hur

b.

                                                 Chocolate        Birthday        Specialty

                                                     Cake               Cake              Cake

Contribution per hour                 Second           Third              First

Explanation:

a.

Contribution margin is the net of sales price and variable cost of an product.

Contribution margin per hour is the rate of contribution margin earned by a product in an hour.

                                                 Chocolate        Birthday        Specialty

                                                     Cake               Cake              Cake

Sales price                                 $20.00            $45.00         $60.00

Variable cost per cake              $5.00              $12.00          $20.00

Contribution Margin                  $15.00             $33.00          $40.00

Hours to bake, frost & decorate 1 hour            2.5 hours     2 hours

Contribution per hour                 $15 / hour      $13.2 / hour  $20 per hur

(Contribution / Numbers of hours)

b.

Company should try to sell the cask with highest contribution per hour rate.

In this given question Speciality cake have highest contribution per hour rate of $20. So, company should sell it more.

The should should try to sell cholcolate cake at second place and birthday cake in third place.