Question

Zume Pizza: Cost-Volume-Profit Analysis

Zume 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 Zume pizza truck by an employee assisted by robots. Zume Pizza started operations in April 2016 and is currently selling about 250 pizzas per day.

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

All pizza preparation and baking happens in the Zume pizza truck. Once the customer orders a pizza, a worker in the Zume food truck will toss the dough, cut the vegetables, and put on toppings. A robot will put on the pizza sauce. Each Zume 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, Zume’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 Zume Pizza in its pizza business.

Description and Cost estimate (in dollars)

• 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

Initial Question:

Please address the question(s) below. In your post, please support your response (why do you think so?)

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

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

Answer 1

Following are the variable costs of a Zume pizza.

· Ingredient cost per pizza: $6.00, as it is consumed based on per pizza basis therefore it is a variable cost

· Truck fuel cost per delivery: $3.00, cost of fuel will change based on the more and more delivery, therefore it is a variable cost.

· Supplies cost per pizza (box, napkins, etc.): $1.00, it will also depend on the no of pizza packed and sold, therefore it is a variable cost.

· Direct labor cost per pizza (driving truck and preparing pizza in truck): $5.00, more labour will be used to bake more pizza therefore labour cost is a variable cost.

Other variable costs that I Zume might incur per pizza are as under:

· Electricity cost for the use of operating ovens, to run the kitchen and ovens the business will require the electricity or gas that will be consumed on per pizza basis therefore it is a variable cost.

• Repair, maintenance and Service of truck, since the pizza truck will require more repair and maintenance as per the movement, therefore more the pizza truck moves to deliver the pizza more will be the repair and maintenance cost, therefore it is a variable cost.

· Marketing and promotions, with more marketing, there will be increase in the sales of the business, therefore it is a variable cost.

Following are the Fixed costs of a Zume pizza.

· Cost of pizza delivery truck i.e $80,000 will be the fixed cost, as it will be incurred one time only and the truck will be depreciated over the estimated life of 5 years.

· Cost of initial software development $30,000 is also a fixed cost as it will be required to sell even a single pizza or more. This will also be amortised over the useful life of 3 years

· Annual maintenance/update costs of software $25,000, since the software will be required to be updated periodically and not based on the per unit of the pizza therefore it is also the fixed cost

· Cost to park pizza delivery truck per year (garage facility) $24,000, as the food truck will be required to be parked to the garage daily, therefore it is a fixed cost for the business as it will not affect the sales of the pizza.

· Insurance and other regulatory costs per year $36,000, to carry on the business of food truck, insurance and regulatory approvals are mandatory and they can not be determined in terms of the the quantity of the pizza

· Cost of cofounders’ salaries per year $150,000, as these costs are paid annually they are fixed cost to the business.

· Cost to rent restaurant kitchen facility for testing and food prep (per year) $45,000, similarly the cost of renting kitchen is also fixed cost, as it is required to be paid on annual basis and do not change as per change in the quantity.

Other Fixed costs that Zume might incur are as under:

· Cost of purchasing or renting the robots: since robots are used on truck to prepare the pizza and assist the worker therefore their purchase or renting cost will be the fixed cost.

· cost of new machine for removal of pizza from oven: As the business is thinking to buy a cost of new machine for removal of pizza from oven then cost of purchasing the machine will be a capital expenditure and hence it will be a fixed cost for the business.