Question

Pat’s Pizzeria produces three types of deli style pizzas: Thin Crust, Deep Dish, and Stuffed Crust. Pat’s anticipated sales mix is 4:5:6 Thin:Deep:Stuffed. Current sales are 1,500 bundles per year.   

	Thin Crust	Deep Dish	Stuffed Crust
Unit Selling Price	$15	$18	$20
Unit Variable Cost	$8	$10	$11

Fixed costs are estimated at $50,000, which include $44,000 for general overhead, such as rent, utilities, etc., and $6,000 for advertising. Pat’s tax rate is 20%.

Round all interim answers to 4 decimal places. For all questions, supporting calculations MUST be included.

1. What is the operating leverage ratio when 1,500 bundles are sold?

If sales increase by 15% from this level, by what percentage should Pat expect profit before tax to increase?

How much is this increase in dollars?

What is Pat’s expected profit before tax in dollars?

B. What is Pat’s margin of safety, in units of each type of pizza, at current level of sales?

C. Prepare a contribution margin income statement for the level of sales required to earn $100,000 of before tax profits. Show revenues and variable costs for each type of pizza in the contribution margin income statement.

D. If Pat increases advertising costs by 200%, sales of all types of pizzas are expected to increase by 12% above the original sales levels. Assuming the sales mix will remain the same, should Pat increase her advertising expenditure? Why or why not?

E. What is the minimum percentage sales would need to increase before Pat would consider the additional advertising? (Hint- at what point will she not lose anything?)

(Return to the original problem assumptions for parts F – G. Do not assume advertising has been increased.)

F. How many bundles of pizza will Pat have to sell to earn after-tax profits equal to 15% of revenue?

G. In analyzing results at the end of the year, Pat discovered that, although she sold 22,500 pizzas as planned, the actual sales mix was 6 Thin Crust, 6 Deep Dish, and 3 Stuffed Crust pizzas. How did Pat’s actual profit differ from her projected profit?   Explain why this happened.

Answer 1

sales mix is 4:5:6

sales are 1,500 bundles per year

Thin Crust Deep Dish Stuffed Crust Total

S.p 15 18 20

V.c 8 8 11

Contribution p.u 7 8 9

Units sold 1500*4=6000,1500*5=7500, 1500*6=9000

Contribution 42000 60000 99000 201000

Fixed Cost 50000

Gross Profit 151000

tax @20% 30200

Profit after Tax 120800

A.Operating Leverage Ratio=Total Contribution/Profit=201000/151000=1.33

ii.if sales increases by 15%=Total Contribution increased =201000*1.15=231150-50000=181150

% increase inprofit=181150-151000=30150/151000==19.9669.

b.Margin of safty=Actual sales -Breakeven sales=50000/7.067=6147.54 units

Breakevensales=FixedCost/Contribution p.u

Contribution p.u=7*4/15+8*5/15+9*6/15=8.1333

Thin Crust Deep Dish Stuffed Crust

Breakeven unit 6147.54*4/15=1639.34 2049(6147.54*5/15) 2459.016((6147.54*6/15)

Actual Sales = 6000 7500 9000

Margin of safty== 4360.66 5451 6540

C.Desired Profit =100000

Fixed cost= 50000

Total Amount to recover from Contribution=150000

so Level of sales=150000/contribution combinrd p.u i.e8.1333=18443.38 units

thin Crust Deep Dish Stuffed Crust

18443in 4;5;6 4918 6148 7377

sales * Contribution p.u 7*5660=35426    8 *7075=49184    9 *8490=66395= 151004

d.sales increased 12% Ad cost=200% =6000*200%=12000 Contribution increase =201000*12%=24120.Net increase contribution=12120 so add should be allowed.

e.12000/201000=5.97%=adv cost/total Contribution

F.Prfot before tax=15/.8=18.75% pBT required18.75X+50000=7x+8x+9x=18X

50000/.75=66666unit 1Thin=66666*7=466667

deep=66666*8=533336

stuffed=66667*9=600000

f.since actual mix change profit also changed.