Question

What costs are relevant when determining how many pizzas a month alfred Pizza must sell to break even?

alfred Pizza uses a combination of robots, artificial intelligence (AI), and GPS in its food trucks to deliver pizzas to customers’ houses just as the pizza is finished baking. Pizzas are actually prepared and baked in the Alfred pizza truck by an employee assisted by robots. alfred Pizza started operations in April 2016 and is currently selling about 250 pizzas per day.

The pizza delivery process starts with a customer using Alfred Pizza’s app to order pizza. The pizza combinations offered by Alfred have been derived by analyzing customer data to offer several popular options. These preset combination recipes are programmed into Alfred’s computers, so that its robots can build and bake the pizzas efficiently.

All pizza preparation and baking happens in the Alfred pizza truck. Once the customer orders a pizza, a worker in the Alfred food truck will toss the dough, cut the vegetables, and put on toppings. A robot will put on the pizza sauce. Each Alfred pizza truck has 56 pizza ovens, which are each individually connected to the order system and the truck’s GPS. A robot will put the pizza into the designated oven exactly four minutes before the truck reaches the customer’s house. A worker will pull out the pizza when it is finished and place it into the cutter, where a robot will cut the pizza. The pizza is boxed and the pizza is delivered to the customer’s door, all within a few minutes of finishing baking. Eventually, Alfred’s owners hope to use a robot to remove pizzas from the oven as well.

Assume that average selling price per pizza is about $18. To follow are estimates of costs that might be incurred by Alfred Pizza in its pizza business.

Description of cost	Cost estimate
Ingredient cost per pizza	$                   6.00
Truck fuel cost per delivery	$                   3.00
Cost of pizza delivery truck (estimated useful life 5 years, no salvage value)	$               80,000
Cost of initial software development (estimated useful life 3 years)	$               30,000
Annual maintenance/update costs of software	$               25,000
Supplies cost per pizza (box, napkins, etc.)	$                   1.00
Cost to park pizza delivery truck per year (garage facility)	$               24,000
Insurance and other regulatory costs per year	$               36,000
Cost of cofounders' salaries per year	$            150,000
Cost to rent restaurant kitchen facility for testing and food prep (per year)	$               45,000
Direct labor cost per pizza (driving truck and preparing pizza in truck)	$                   5.00

Questions

From the list above, what costs would you classify as variable with respect to the cost of a Alfred pizza? Are there any other variable costs you could envision that Alfred might incur per pizza? Explain.

From the list above, what costs would you classify as fixed with respect to the cost of a Alfred pizza? Are there any other fixed costs you could envision that Alfred might incur in its pizza business? Explain.

What costs from the list and any costs you thought of for Questions #1 and #2 above would you use to calculate the break even number of pizzas that Alfred Pizza must sell per day? Why did you included these costs? Calculate the break even number of pizzas.

Given your answer for the current break even number of pizzas, calculate Alfred’s margin of safety in number of pizzas (if any margin of safety exists.) What does this margin of safety mean?

Answer 1