Question

Part A

Indicate whether each of the following costs would be classified as direct materials, direct labour, manufacturing overhead or period cost. (1 Mark each)

Cost of grapes purchased by a winery
Depreciation on pizza ovens of a pizza restaurant
Salary of a plant manager in a computer production facility
Depreciation of computers used in a sales department
Wages of drill-press operators in a manufacturing plant

Part B

Buddy’s Pizza is famous for making Margherita pizzas and delivers pizzas to the suburb on the Lower North Shore of Sydney in New South Wales. The sales price of a pizza is $12. It is estimated that the company will incur a variable cost of $270000 to make and deliver 30000 pizzas. The company’s estimated fixed costs are $63000.

Required: (Show all calculations)

a)     What is Buddy’s Pizza’s contribution margin ratio?

b)    Calculate Buddy’s Pizza’s break-even point in units (pizzas).

c)     Calculate Buddy’s Pizza’s break-even point in sales dollars.

d)    (i) What is Buddy’s Pizza’s margin of safety ratio?

(ii) How can managers of Buddy’s Pizza use this margin of safety ratio information to manage the profitability of the business?

e)     How many pizzas must the company sell to earn a target profit of $75000?   (Total 20 Marks)

Answer 1

Correct Answer:

a	Contribution margin ratio	25.0%
b	Break-even point in unit	21000.0
c	Break-even point in dollars	252000.0
d	Margin of safety ratio	30%
e	Units required to earn target profit	46000

Working:

A	sales price	$              12.0
B	Less: Variable cost	$                 9.0
C=A-B	Contribution margin	$                 3.0
D=C/A*100	Contribution margin ratio	25.0%
E	Fixed cost	$      63,000.0
F=E/C	Break-even point in unit	21000.0
G=F/D	Break-even point in dollars	$        252,000

	A	B	C=A-B	D=C/A*100
	Current sales level	Break-even sales level	Difference ($)	Difference (%)
Sales Level	30,000	21000	Margin of safety	Margin of safety ratio
Sales Revenue	360000	252000	108000	30%

A	sales price	$               12.0
B	Less: Variable cost	$                 9.0
C=A-B	Contribution margin	$                 3.0
D	Fixed cost	$      63,000.0
E	Target Profit	$      75,000.0
F=D+F	Total	$    138,000.0
G= F/C	Units required to earn target profit	46000

End of Answer.

Thanks