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

Vinny’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 $10. It is estimated that the company will incur a variable cost of $150000 to make and deliver 25000 pizzas. The company’s estimated fixed costs are $54000.

Required: (Show all calculations)

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

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

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

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

(ii) How can managers of Vinny’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 $60000? (Total 20 Marks)

Answer 1

Correct Answer:

a	Contribution margin ratio	40.0%
b	Break-even point in unit	13500.0
c	Break-even point in dollars	135000.0
d	Margin of safety ratio	46%
e	Units required to earn target profit	28500

Working:

A	sales price	$               10.0
B	Less: Variable cost	$                 6.0
C=A-B	Contribution margin	$                 4.0
D=C/A*100	Contribution margin ratio	40.0%
E	Fixed cost	$      54,000.0
F=E/C	Break-even point in unit	13500.0
G=F/D	Break-even point in dollars	$        135,000

	A	B	C=A-B	D=C/A*100
	Current sales level	Break-even sales level	Difference in Dollars	Difference in Percentage
Sales Level	25,000	13500	Margin of safety	Margin of safety ratio
Sales Revenue	$    250,000.0	$ 135,000.0	115000	46%

A	sales price	$               10.0
B	Less: Variable cost	$                 6.0
C=A-B	Contribution margin	$                 4.0
D	Fixed cost	$      54,000.0
E	Target Profit	$      60,000.0
F=D+F	Total	$    114,000.0
G= F/C	Units required to earn target profit	28500

End of Answer.

Thanks