Question

In: Accounting

) Randy's Pizza delivers pizzas to dormitories and apartments near a major state university. The company's...

) Randy's Pizza delivers pizzas to dormitories and apartments near a major state university. The company's annual fixed costs are $48,000. The sales price averages $9, and it costs the firm $3 to make and deliver each pizza.

Required:

A. How many pizzas must Randy's sell to break even?

B. How many pizzas must the company sell to earn a target profit of $54,000?

C. If budgeted sales total 9,900 pizzas, how much is the company's safety margin in dollars?

D. Tony's assistant manager, an accounting major, has suggested that the firm should try to increase the contribution margin per pizza. Explain the meaning of "contribution margin" in layman's terms.

Solutions

Expert Solution

Answer A.

Selling Price per pizza = $9
Variable Cost per pizza = $3

Contribution Margin per pizza = Selling Price per pizza - Variable Cost per pizza
Contribution Margin per pizza = $9 - $3
Contribution Margin per pizza = $6

Breakeven Point = Fixed Costs / Contribution Margin per pizza
Breakeven Point = $48,000 / $6
Breakeven Point = 8,000 pizzas

Answer B.

Required Sales = (Fixed Costs + Target Profit) / Contribution Margin per pizza
Required Sales = ($48,000 + $54,000) / $6
Required Sales = 17,000 pizzas

Answer C.

Budget sales = 9,900 pizzas

Budgeted Sales = Number of pizza sold * Selling Price per pizza
Budgeted Sales = 9,900 * $9
Budgeted Sales = $89,100

Breakeven Sales = Breakeven Point * Selling Price per pizza
Breakeven Sales = 8,000 * $9
Breakeven Sales = $72,000

Margin of Safety = Budgeted Sales - Breakeven Sales
Margin of Safety = $89,100 - $72,000
Margin of Safety = $17,100

Answer D.

Contribution margin per pizza is the difference between sales price and variable cost per pizza. Company can increase contribution margin per pizza by either increasing sales price per pizza or decreasing variable cost per pizza.

ekkarill92 answered 1 year ago
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