Question

In response to a growing awareness of gluten allergies, Outland Bakery tried using gluten-free flour in its three most popular cookies. After several attempts and a lot of inedible cookies, the company perfected new recipes that yield delicious gluten-free cookies. The costs of producing a batch of 100 cookies are as follows:

	Chocolate chip	Sugar	Oatmeal Raisin
Sales price	$                    130	$                     125	$                    120
Variable cost	$                      81	$                        86	$                       78
Fixed cost	18	15	20
Total cost	99	101	98
Gross profit	$                      31	$                        24	$                       22
Pounds of flour	2.5	2.5	2

1. Assuming no raw material constraints and unlimited demand for cookies, what type of cookie would maximize the company’s contribution margin? Why?
2. Assume that, based on typical customer demand, Outland will sell 12,000 batches of chocolate chip cookies, 8,000 batches of sugar cookies, and 10,000 batches of oatmeal raisin cookies. What will the company’s contribution margin be?
3. Outland’s flour supplier has announced a shortage of gluten-free flour. As a result, Outland will only be able to purchase 50,000 pounds of flour. How many batches of each type of cookie should the company bake? What will the company’s contribution margin be?
4. If Outland uses gluten-free flour in other products, will the allocation you recommend in part (c) change? Why or why not?

Answer 1

a)
	Chocolate chip	Sugar	Oatmeal Raisin
Sales price	$                                                                130.00	$                               125.00	$           120.00
Less: Variable cost	$                                                                  81.00	$                                 86.00	$             78.00
Contribution Margin	$                                                                  49.00	$                                 39.00	$             42.00
Contribution Margin ratio	37.7%	31.2%	35.0%
Chocolate Chip cookie would maximize the company’s contribution margin because they have the highest contribution margin per batch.
b)
	Batches	Contribution Margin Per Unit	Total Contribution Margin
Chocolate Chip	12000	$                                 49.00	$   5,88,000.00
Sugar	8000	$                                 39.00	$   3,12,000.00
Oatmeal Raisin	10000	$                                 42.00	$   4,20,000.00
Total Company's contribution margin			$ 13,20,000.00
c)
	Chocolate Chip	Sugar	Oatmeal Raisin
Contribution margin	49	48	42
÷ lbs. flour per batch	÷ 2.5	÷ 2.5	÷ 2
Contribution margin/lb.	19.6	19.2	21
Production order	2	3	1
		Flour Remaining
		50,000 lbs.
Oatmeal Raisin	10,000 batches × 2 lbs. = 20,000 lbs. used	30,000 lbs.
Chocolate Chip	10,000 batches × 2.5 lbs. = 25,000 lbs. used	5,000 lbs.
Sugar	2,000 batches × 2.5 lbs. = 5,000 lbs. used	0 lbs.
	Batches	Contribution Margin Per Unit	Total Contribution Margin
Chocolate Chip	10000	$                                 49.00	$   4,90,000.00
Sugar	2000	$                                 39.00	$      78,000.00
Oatmeal Raisin	10000	$                                 42.00	$   4,20,000.00
Total Company's contribution margin			$   9,88,000.00
d)
Yes, all products using gluten-free flour must be considered. Allocation of the flour will depend on the contribution margin per pound of flour generated by the other products.