College Pizza delivers pizzas to the dormitories and apartments near a major sta

Question

College Pizza delivers pizzas to the dormitories and apartments near a major state university. The company's annual fixed expenses are $68,000. The sales price of a pizza is $10, and it costs the company $2 to make and deliver each pizza. (n the following requirements, ignore income taxes.) Required: 1. Using the contribution-margin approach, compute the company's break-even point in units (pizzas). 2. What is the contribution-margin ratio? (Round your answer to 1 decimal place.) 3. Compute the break-even sales revenue. Use the contribution-margin ratio in your ht ances calculation. 4. How many pizzas must the company sell to earn a target profit of $74,000? Use the equation method. 1. Break-even point 2. Contribution-margin ratio 3. Break-even point sales dollars pizzas 4. Number of pizzas

Explanation / Answer

1. Calculation of Break-even point

Annual Fixed Cost = $68,000

Contribution per unit = $ 8 per unit (10-2)

Break-even point in units = Fixed Cost / Contribution per unit = 68000/8 = $8500 units

2. Contribution Margin Ratio = Contribution per unit / Selling Price per unit = 8/10*100 = 80%

3.Calculation of Break-even point (Sales Value):

Break-even point = Fixed Cost / Contribution Margin Ratio = 68000/80% = $ 85,000

4. Target Sale (units) to earn profit of $ 74,000 = (Fixed Cost + Target Profit) / Contribution Per unit = (68000+74000)/8 = 17,750 units

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