Cost/volume/profit Relationships
Essay by rachelregen • October 24, 2017 • Coursework • 1,047 Words (5 Pages) • 1,769 Views
Unit 2 – Cost/Volume/Profit Relationships
Assignment 2 – Question 1 (4 marks)
a) Carlita operates a take-out only pizza parlor that specializes in four-cheese pizzas. Carlita offers four different pizza sizes and she knows what it costs to make each size. Help her calculate her food cost percentage and contribution margin for each size pizza. (2 marks)
b) Which pizza size do you think is Carlita’s most profitable? Why? (2 marks)
Pizza Size | Product Cost | Selling Price | Food Cost % | Cont. Margin |
Small | $3.25 | $ 9.99 | 32.5% | 6.74 |
Medium | $4.25 | $11.99 | 35.45% | 7.74 |
Large | $5.25 | $13.99 | 37.53% | 8.74 |
Extra Large | $6.25 | $15.99 | 39.09% | 9.74 |
Extra-large pizza would have the most profitable since its contribution margin is the highest. When the contribution margin increases, the profit also increases.
Assignment 2 – Question 2 (5 marks)
The manager of Brass Taps is estimating the fixed costs for the upcoming year will be $425,500 and is hoping to have a profit of $135,000. Last year the average check for customers was $14.00.
a) If the variable cost is $695,000 how much in sales would Brass Taps have to do in order to earn the target profit of $135,000. (2 marks)
Sales= Variable Cost+ Fixed Cost+ Profit
Sales= $695,000+$425,500+$135,000
= $834,000
b) What would be the contribution rate? (2 mark)
Variable Rate= Variable Cost / Sales
= $695,000/$834,000
= .83
Contribution Rate= 1-VR
= 1-.833
= 0.167
c) How much does Brass Taps have to make in order to break even? (1 mark)
S= (FC+P)/ CR
= ($425,500+0)/ 0.167
= $2,547,904.19
Assignment 2 – Question 3 (7 marks)
You volunteer at a local school’s lunch program. Ronnie, the school administrator, knows that you have to take the HTM 2030 course and needs your opinion on whether the school should make their own pizzas as a fundraiser or if they should continue to purchase the pizza from a large national chain.
Unfortunately, Ronnie is very busy, so she does not have time to meet with you, but she has left you a note with the following information and a few critical questions:
- There are 200 students in the school.
- The school does a pizza fundraiser every week for 28 weeks of the year.
- On average each student in the school orders 1.25 pieces of pizza each week.
- They currently order from a national chain. Each pizza has 15 large slices and costs $15 per pizza.
- The school is located in an economically challenged neighbour hood, as such, she does not believe that they will pay more than $2 for a piece of pizza.
- They have received an offer from another organization that supplies the fresh organic wholesome supplies to make the pizza. The pizza crusts have whole wheat crusts, organic vegetables and sauce, and skim milk cheese. Although the school would need to find volunteers to assemble the pizzas, they could use the school kitchen to bake and cook the pizzas. The school would need to spend $190 on cooking utensils and other fixed assets each year. The cost of the pizza crusts, veggies, and cheese is $9 a pizza that can be cut into 10 very large slices (equivalent size to the national chain slices). The waste on the pizza crusts, veggies, and cheese is approximately 10% per pizza.
- The school relies on the pizza fundraiser to fund other nutrition programs; therefore they must continue to make at least the same amount of profit.
- How many of the organic pizzas would the school have to sell each week before they recovered their costs and made the same amount of money as the current pizza fundraiser? (5 marks)
# of the organic pizzas= Fixed Cost+ Profit/ CM
= ($190+ ($9x 28 weeks))/ ($9-$9x10%)
= ($90+$252)/8.1
=42.2 of the organic pizzas
- List at least two other qualitative factors should Ronnie consider when making this decision? (2 marks)
Advertising the event and employee moral by providing more student to volunteer are the other qualitative factors.
- Do you recommend that the school make their own pizzas or continue to purchase them from the national chain? Why or why not? (1 mark)
I recommend that the school should continue to purchase them from the national chain because they got offered of organic pizzas which benefits students who prefer organic ingredients. The school also able to reduce the extra costs on labour and other food costs.
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