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Donut Problem and Solution

The doughnut shop manager is analyzing which products to promote or discontinue given fixed costs, capacity constraints, and upcoming changes in demand. Cream filled doughnuts have the highest contribution margin of $2.10 per dozen. Promoting cream filled doughnuts would generate an additional $105 in contribution to cover fixed costs. Jam filled doughnuts have the lowest contribution margin and should be discontinued unless the equipment could be better utilized. The shop may need to discontinue jam filled doughnuts and reallocate production capacity if a promotion increases demand beyond existing capacity limits.

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Vincent Choi
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200 views2 pages

Donut Problem and Solution

The doughnut shop manager is analyzing which products to promote or discontinue given fixed costs, capacity constraints, and upcoming changes in demand. Cream filled doughnuts have the highest contribution margin of $2.10 per dozen. Promoting cream filled doughnuts would generate an additional $105 in contribution to cover fixed costs. Jam filled doughnuts have the lowest contribution margin and should be discontinued unless the equipment could be better utilized. The shop may need to discontinue jam filled doughnuts and reallocate production capacity if a promotion increases demand beyond existing capacity limits.

Uploaded by

Vincent Choi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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A doughnut shop makes three basic types of doughnuts: cream filled, chocolate filled, and jam filled.

The doughnut
shop manager is analyzing the product mix and has collected the following information:

The production manager says the fixed costs are unavoidable and are allocated to each doughnut type based on the
quantity produced and we are currently running with excess capacity.

The sales manager says he can run a promotion for $85 to increase sales by 50 dozen. The manager has asked you to
determine which donuts should be promoted. The manager also advises that they have a new contract and sales of
chocolate donuts will increase in the next 3 months. If we run the promotion, then in three months we will not have
sufficient capacity, please advise on which products should be made or should we still run the promotion.
1. The donut shop should promote the product with the highest
contribution margin since fixed costs are unavoidable.

Chocolate Cream Jam


filled filled filled

Sales price per dozen $4.00 $3.00 $2.50

Direct cost per dozen (2.10) (0.90) (2.00)

CM per dozen $1.90 $2.10 0.50

In this case, the cream filled donuts have the highest contribution margin
so they should be promoted. This will result in $2.10 x 50 dozen = $105 in
additional contribution to cover fixed costs.

2. The jam-filled donuts contribute $0.50 per dozen to covering the fixed
costs so they should not be dropped unless the shop has the
opportunity to add a more profitable product or to put the equipment
used to make jam-filled donuts to an alternative, more profitable use.

3. If the shop is currently operating at capacity, it is likely they could put


the equipment currently used to produce jam-filled donuts to an
alternative profitable use, specifically producing more of the other two
types of donuts. If the shop can produce and sell enough of the other
two types of donuts to make a profit using the equipment currently
devoted to making jam-filled donuts, then dropping the jam-filled line
would be a good idea.

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