Question

You’re inspired after your tour of Italy – you have a vision and a plan to bring a wholly authentic recreation of the Roman pizza experience to London, Ontario: large rectangular pizzas baked in traditional wood- fired ovens, topped with high quality ingredients, and sold in slices by weight to customers.

Your plan is for Torta al Taglio to be relatively small with little in the way of seating, instead replicating the Italian model of having consumers purchase their slices and take them to go. It will neither offer delivery nor will it take orders. Rather, each pizza will be a canvas upon which your chefs will have the chance express their culinary creativity and showcase their commitment to authenticity and craft. Doing this means bringing together handmade dough with the finest imported Italian ingredients and the freshest local seasonal Ontario produce as you create new and unique gourmet pizza experiences for customers.

Elevating and honoring the work of those pizzaiolo

(pizzamakers) you encountered in Rome will not be

cheap – nor should it be! You expect the average

cost of a slice of pizza at Torta al Taglio will be $8.

Each rectangular pizza contains 12 slices. You

expect the average cost in ingredients for each

pizza is $12 and will take, on average, 30 minutes

of prepare. You plan to hire on a cook who will earn

$25/hr to help prepare each pizza. Marco-Fabio, the

pizzaiolo you met in Rome has agreed to come to

London and oversee the pizza-making process at a

salary of $70,000 per year. You also plan to pay

yourself an initial salary of $60,000 per year for

managing the business, handling promotional activities, and interacting with customers. You estimate that rent, equipment, utilities, promotions, and insurance will cost approximately $80,000 per year.

You worry that $8/slice is too steep a price for a slice of pizza outside of Italy, however. Particularly so when there are several pizza chains in that offer an entire pizza for a comparable price. Will Londoners appreciate the authenticity and craft? You start to wonder if it makes more sense to invest your time, effort, and energy serving those more value-conscious consumers. Your “Plan B” is for Amalgamated Pizza Works – using old-world inspiration but filtered through new world industrial efficiency: A contemporary, speedy pizza experience where consumers select toppings to be added by your counter staff to a ready-made pizza crust and then quickly cooked in modern gas-fired ovens for $10. You expect the assembly-line nature will help to control labor costs which you estimate will be $5 per pizza. You estimate that average cost of ingredients per pizza will be $2 as you have chosen to focus on common and readily available toppings that can be sourced cheaply through most restaurant suppliers. You will still need a chef to oversee the process but at a salary of $40,000. Your planned salary and your estimates for rent, equipment, utilities, and insurance are the same.

Based on the above information and your own insights and application of the course material, please answer the following:

a. Evaluate the two plans described above in terms of their relative revenues and associated costs. Which plan seems to be the soundest? Please ignore taxes, shipping, and duties for the purposes of answering this question and please show your work and explain your answer.

Answer 1

Plan A-

Lets first assume that the restaurant is open 9 hours a day, all days.

Costs (pear year)-

At half an hour a pizza, there will be 18 pizza made in a day. Per pizza material cost is 12, so

Material cost per year= 18*12*365=78840.
Cost of chef=25*9*365=82125
Salary of Pizzaiolo=70000
Your salaty=60000
Other costs=80000

Total yearly cost=78840+82125+70000+60000+80000= 370965

Total revenue= number of pizzas*12*8

=18*12*8*365= 630720

Profit=630720-370965= 259755

Lets also check where this plan will breakeven. The variable costs per pizza are 12 (material)+12.5 (chef)=24.5. The revenue per pizza is 12*8=96. Profit per pizza=96-24.5=71.5. But then there are fixed costs. The breakeven amount of pizzas would be

(70000+60000+80000)/71.5=2397 pizzas per year. Or

2397/365=6.57 pizzas per day.

Plan B-

Costs=

Assuming the number of pizzas and slices remain same.

Material cost=18*2*365=13140
Labor costs=18*5*365=32850
Chef Salary=40000
Own salary=60000
Other costs=80000

Total cost=13140+32850+40000+60000+80000= 225990

Total revenue=18*10*365=65700

Profit=65700-225990= -160290

This is a loss. In plan B, the revenue per pizza is 10. The variable cost is 5+2=7. That means $3 profit per pizza. But there are fixed costs too. So, the quantity where this plan will breakeven is

(40000+60000+80000)/3=60000, or at least 165 pizzas every day.

To me plan A sounds better as it will break even at a much lower quantity of pizzas sold.