Three products of Domino's Pizza Enterprises - Selling Prices, Variable Costs, Contribution Margins, Constraints + Commentary

 

(updated)

 

· It should be noted that the following selling prices as well as variable costs are just estimations and not the actual selling prices and variable costs of Domino’s Pizza Enterprises products.

· Contribution Margin = Sales – Variable Costs

· Contribution Margin Ratio = Contribution Margin / Sales Revenue x 100

 

Three products of Domino’s Pizza Enterprises:

1) Traditional Supreme Pizza

 

Selling Price = $11
Variable Cost = $6
Contribution Margin = $11 - $6 = $5
Contribution Margin Ratio = $5 / $11 x 100 = 45%

 

2) Cheesy garlic bread

 

Selling Price = $4.50
Variable Cost = $2
Contribution Margin = $4.50 - $2 = $2.50
Contribution Margin Ratio = $2.50 / $4.50 x 100 = 55%

 

3) Belgian Choc lava cake

Selling Price = $6.50
Variable Cost = $3.50
Contribution Margin = $6.50 - $3.50 = $3
Contribution Margin Ratio = $3 / $6.50 x 100 = 46%

 

Contribution margins

What’s a contribution margin? It’s the amount each dollar of sales contributes to covering both – fixed costs as well as generating profit. The amount is not used to cover variable costs.
As we see above, contribution margins are calculated through selling prices and variable costs, it is clear that if one of them changes, evidently the contribution margin would change. For example, if the garlic bread’s selling price went up by 50 cents, then the contribution margin would increase by 50 cents. If the garlic bread’s variable costs would increase by a dollar, then the contribution margin would decrease by a dollar. The prices can change instantly, hence they will straight away affect the contribution margin.
The products’ contribution margins will always be different since each product has its own distinctive variable cost and selling cost. Also the contribution margin will always vary since in order for a company to make profit, the selling price of a product has to be bigger than it cost for the company to produce it. In order to keep the company’s profit levels maximised, contribution margins have to be balanced; companies need to sell different products that are both popular, as well as sold with a reasonable price. Companies that use more expensive items to generate sales and create cash flow, will most likely generate less profit than companies who sell cheaper items in big quantities. For example, when looking at two examples: a supermarket, and a car dealership, it is obvious that the car’s dealership’s contribution margins are a lot higher. So does that mean they earn more profit? Not necessarily. When we think about the two places in reality, which one is busier? Obviously the supermarket. They sell more products in a day than a car dealership sells in a month, since they offer a range of affordable products people need in their lives daily. So if Domino’s would only start selling gourmet pizzas and nothing else, the contribution margin would unbalance and before they’d know it, Domino’s would lose a lot of profit as well as their whole clientele  – I’m certain that removing the cheesy garlic bread from the menu would be analogous to declaring a war.

Constraints

What are some possible resource constraints that Domino’s Pizza Enterprises may face?
I think the biggest constraint Domino’s might face is fresh supplies. In the first part of the Assignment #1 I found out that Domino’s is very serious about providing their customers top quality food, which in turn means top quality supplies starting from finest flour to make the dough and ending with the fresh vegetables for the toppings. Flour obviously wouldn’t be too big of an issue, however their fresh supplies such as tomatoes, mushrooms, capsicum and so on are influenced by many factors, such as the seasons, the weather, workforce, transport and so on. So evidently off-season the price of certain vegetables and fruits go up, which means to make a pizza – its variable costs go up, which decreases the contribution margin. In my opinion, there’s not a lot Domino’s can do about it. I mean, if a tomato plantation that supplies them with tomatoes gets flooded by a cyclone, there’s not much Domino’s can do about it. Using old supplies is a definite no-go, since on of Domino’s trademarks is to supply the freshest food to the customers. However they can’t start producing pizzas without tomato, they’d still have to be able to have toppings with tomatoes and tomato sauce, so maybe one option would be to retain several suppliers in different locations? Maybe decrease the prices of the pizzas that don’t contain tomato so people would be buying more of them until they’d be able to get the vegetables in?
Another constraint Domino’s might face is the industry competition, where there’s so many fast food suppliers, each trying to make a profit. For Domino’s to be able to keep up with them, a balance between contribution margins is a must – they have to continue deliver good quality food for an affordable prices. Their products can’t be more expensive than their competitors’, however, they still have to keep the selling prices above the production costs. One of Domino’s resolutions to compete with competition is to offer great specials such as ‘buy two pizzas and get garlic bread free’ or ‘order three pizza and a garlic bread combo and the delivery to your house is free’.