Bakery Capacity, Wastage and a Bulk Cupcake Order
A Rohtak bakery prepares fresh stock each morning. A cupcake sells for ₹40 and costs ₹18 in ingredients plus ₹7 in direct labour; a cookie sells for ₹20 and costs ₹9 in ingredients plus ₹2 in direct labour. On a typical day the bakery produces 590 cupcakes and 340 cookies, but 12% of cupcakes and 8% of cookies remain unsold and are discarded. Fixed costs-rent, salaries, utilities-are ₹4,200 per day. The kitchen can make at most 1,000 items per day; one item of either type consumes one unit of capacity.
A corporate office offers to buy 400 cupcakes at ₹30 each for a one-day event. The order must be delivered in addition to normal trading, and the bakery cannot expand capacity that day. The owner wants to know whether the order is profitable, and what minimum price would justify accepting it. Labour for the order would be the same per cupcake, and no wastage is expected on a pre-ordered batch.
1. Calculate the bakery's current average daily profit and the number of cupcakes it would need to produce and sell daily to break even if it sold only cupcakes, assuming no wastage.
Read the worked answer
Contribution per unit
- Cupcake: ₹40 − (₹18 + ₹7) = ₹15
- Cookie: ₹20 − (₹9 + ₹2) = ₹9
Because some production is discarded, use contribution per item produced:
- Cupcake: ₹15 × 0.88 = ₹13.20
- Cookie: ₹9 × 0.92 = ₹8.28
Current daily contribution
- Cupcakes: 590 × ₹13.20 = ₹7,788
- Cookies: 340 × ₹8.28 = ₹2,815.20
- Total = ₹10,603.20
Current daily profit = ₹10,603.20 − ₹4,200 = ₹6,403.20.
Break-even with only cupcakes, no wastage
Required contribution = ₹4,200. Each cupcake contributes ₹15, so break-even production = 4,200 ÷ 15 = 280 cupcakes. If the 12% wastage remained, the requirement would be 4,200 ÷ 13.20 ≈ 318.2, i.e. 319 cupcakes produced.
2. Evaluate the ₹30 order. Should the bakery accept it? Calculate the minimum acceptable price per cupcake if accepting the order requires displacing existing production, and state which product should be displaced first.
Read the worked answer
Order contribution before capacity effects
Price ₹30 − variable cost ₹25 = ₹5 per cupcake. For 400 cupcakes, contribution = ₹2,000.
Capacity check
Current production = 590 + 340 = 930 items. Capacity = 1,000, so only 70 units are free. The order needs 400 units, so 330 units of existing production must be displaced.
Displace cookies first
Cookie contribution per item produced is ₹8.28, lower than the cupcake's ₹13.20. Displacing 330 cookies costs 330 × ₹8.28 = ₹2,732.40.
Net effect = ₹2,000 − ₹2,732.40 = −₹732.40. The order destroys value at ₹30 and should be rejected.
Minimum price
Minimum price = variable cost + displaced contribution per order unit = 25 + (2,732.40 ÷ 400) = 25 + 6.831 = ₹31.83 approximately. Rounding up, quote at least ₹31.85–₹32 per cupcake. If cupcakes had to be displaced instead, the minimum would be much higher (25 + 330 × 13.20 ÷ 400 = ₹35.89).
3. Suppose the bakery can reduce cupcake wastage from 12% to 5% through better forecasting at an added fixed cost of ₹300 per day. Using current production and assuming demand can absorb the extra saleable cupcakes, would this be worthwhile? Show the calculation.
Read the worked answer
Current saleable cupcakes = 590 × 0.88 = 519.2. With 5% wastage, saleable cupcakes = 590 × 0.95 = 560.5.
Extra units sold = 560.5 − 519.2 = 41.3 cupcakes.
The variable cost of producing the 590 cupcakes is already incurred, so the extra contribution is the selling price of the additional units:
41.3 × ₹40 = ₹1,652.
Net benefit = ₹1,652 − ₹300 additional fixed cost = ₹1,352 per day.
Yes, it is worthwhile under the stated demand assumption. If demand is capped at the old sales level, the better action would be to reduce production rather than simply reduce wastage; the saving would then be the avoided variable cost on the units no longer produced.