Please, show your work and calculations for a full credit and clearly mark your
ID: 344440 • Letter: P
Question
Please, show your work and calculations for a full credit and clearly mark your answers 01. The local convenience store wants to make pan pizzas. The first option is to sell fully cooked pizzas, for the customer. This process has a fixed cost of $150,000, and $7 ingredient and $3 labor variable costs per pizza. The owner is considering two other alternatives: partially-cooked and completely frozen. The partially-cooked process has a fixed cost of $175,000 and $5 ingredient and $3 labor variable costs per pizza. The third alternative, variable costs per pizza. The owner expects to sell 18,000 pizzas, $20 each. What process should he choose completely frozen pizzas, has a fixed costs of $220,000 and $4 ingredient and $2 labor and why? What is the profit of your solution?Explanation / Answer
The process that should be selected is the 3rd option of selling completely frozen pizzas. This is because in case of this option the contribution margin % is the highest. The reason is that this option is contributing the most towards covering the fixed costs.
The profit of my solution is an absolute contribution margin of $252,000 and a net income of $32,000.
Computations and explanations:
Total ingredient costs = ingredient cost per pizza*no. of pizzas
Thus total ingredient cost for option I = $7*18,000 = $126,000. Similarly it has been computed for other options.
Total labor costs = labor cost per pizza*no. of pizzas
Thus total labor costs for option I = $3*18,000 = $54,000. Similarly it has been computed for other options.
Option I Option II Option III Total pizza sold 18,000.00 18,000.00 18,000.00 $ revenues (no. of pizza's sold*$20) 360,000.00 360,000.00 360,000.00 less: variable expenses Total ingredient costs 126,000.00 90,000.00 72,000.00 Total labor costs 54,000.00 54,000.00 36,000.00 Contribution margin (revenues - variable costs) 180,000.00 216,000.00 252,000.00 Contribution margin % 50.00% 60.00% 70.00% Fixed costs 150,000.00 175,000.00 220,000.00 Net income (contribution margin - fixed costs) 30,000.00 41,000.00 32,000.00 Net income % 8.33% 11.39% 8.89%