A doughnut shop makes three basic types of doughnuts: cream filled, chocolate fi

Question

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: Chocolate Cream Jam Filled Filled Filled Sales price $ 4.00 $ 3.00 $ 2.50 per dozen Direct cost (2.10) 0.90) (2.00) per dozen (0.40) (0.50) (1.00) Fixed overhead per dozen Profit per 1.50 1.60 (0.50) dozen The fixed costs are unavoidable and are allocated to each doughnut type based on the quantity produced. The doughnut shop has excess capacity Requirea: 1-a.Calculate the contribution margin per dozen for each doughnut. (Round your answers to 2 decimal places.) Chocolate Cream Jam Filled Filled Filled Contribution margin er dozern 1-b.Which product should the doughnut shop promote if the promotion will result in an increase in sales of 50 dozen of the promoted product? Cream filled Chocolate filled Jam filled 2-a.Should the jam-filled doughnuts be dropped from the product line? O Yes No

Explanation / Answer

Requirement 1(a) – Contribution Margin Per Dozen for each Doughnut

Chocolate Filled

Cream Filled

Jam Filled

Sales Price per Dozen

$4.00

$3.00

$2.50

Less: Variable Cost per Dozen

$(2.10)

$(0.90)

$(2.00)

Contribution Margin per Dozen

$1.90

$2.10

$0.50

Requirement 1(b) – “Jam Filled “

Doughnut Shop should promote Jam Filled Product as we can a Loss in Jam Filled Product Segment

Requirement 2(a) – NO

NO. The Jam Filled Product Should not be Dropped. Since the given fixed costs are unavoidable. Even if the Doughnut Shop dropped the Jam Filled Product, they would incur the fixed costs since the fixed costs are unavoidable. So it’s better to continue with the Jam Filled Product

Chocolate Filled

Cream Filled

Jam Filled

Sales Price per Dozen

$4.00

$3.00

$2.50

Less: Variable Cost per Dozen

$(2.10)

$(0.90)

$(2.00)

Contribution Margin per Dozen

$1.90

$2.10

$0.50

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