Bakery Mix, Price, and Capacity Variances
Ridgeway Bakery budgeted 40,000 boxes for October: 30,000 standard at $15 and 10,000 artisan at $26. Budgeted variable costs were $9 and $14; fixed costs $180,000. Actual sales were 44,000 boxes: 26,000 standard at $15.20 and 18,000 artisan at $24. Actual variable costs were $9.40 and $15.20; fixed costs $190,000. The oven can produce 13,000 oven-hours per month; standard uses 0.2 hour per box and artisan 0.4 hour. Demand for artisan bread rose after a competitor closed, and the plant ran overtime. The plant manager argues that the standard line should be dropped because artisan earns $12 budgeted contribution per box versus $6 for standard. The sales director warns that standard bread brings shoppers who also buy artisan products. The CFO wants a reconciliation that separates volume, mix, price, variable cost, and fixed cost effects before any line decision.
1. Reconcile budgeted profit to actual profit using volume, mix, selling price, variable cost, and fixed cost effects.
Read the worked answer
Budget contribution: standard 30,000 × ($15 − $9) = $180,000; artisan 10,000 × ($26 − $14) = $120,000; total $300,000; budget profit = $300,000 − $180,000 = $120,000. Actual contribution: standard 26,000 × ($15.20 − $9.40) = $150,800; artisan 18,000 × ($24 − $15.20) = $158,400; total $309,200; actual profit = $309,200 − $190,000 = $119,200. Budget weighted contribution per box = $300,000/40,000 = $7.50. Volume effect = (44,000 − 40,000) × $7.50 = $30,000 F. Actual mix contribution at budget prices/costs = (26/44 × $6) + (18/44 × $12) = $8.4545; mix effect = 44,000 × ($8.4545 − $7.50) = $42,000 F. Selling price: standard 26,000 × $0.20 = $5,200 F; artisan 18,000 × ($2) = $36,000 U; total $30,800 U. Variable cost: standard 26,000 × $0.40 = $10,400 U; artisan 18,000 × $1.20 = $21,600 U; total $32,000 U. Fixed cost = $10,000 U. Sum: $30,000 + $42,000 − $30,800 − $32,000 − $10,000 = −$800, matching the profit fall from $120,000 to $119,200.
2. Evaluate the plant manager's proposal to drop the standard line, using contribution per oven-hour and strategic factors.
Read the worked answer
Contribution per box is not the right decision metric when the oven is the constraint. At budget, standard earns $6/0.2 = $30 per oven-hour and artisan earns $12/0.4 = $30 per oven-hour, so neither is superior. At actual, standard earns $5.80/0.2 = $29 per oven-hour, while artisan earns $8.80/0.4 = $22 per oven-hour; artisan has become the weaker user of capacity because its price fell and its variable cost rose. Dropping standard would free 26,000 × 0.2 = 5,200 oven-hours. If those hours were filled with artisan bread at actual contribution, the gain would be 5,200 × $22 = $114,400, but the lost standard contribution is $150,800, a net loss of $36,400 before considering demand limits. Strategically, standard bread also drives customer traffic and basket sales. The better response is to investigate the artisan cost overrun and the $2 price reduction, renegotiate supply costs, and manage overtime, rather than drop a line that is still profitable per constrained hour.