Question

Pete's Pizzas is a small company that makes gourmet frozen pizzas for supermarkets to sell. Each pizza is sold to a retailer for $6.10. Variable and fixed costs are:

Item	$
Variable cost per pizza
Toppings	$1.00
Cheese	$0.05
Dough	$1.10
Handling	$0.50
Box	$0.10
Selling	$1.50
Fixed Cost per annum
Overheads	$35,000.00
Administration	$14,000.00

Pete's Pizzas sold 36,000 frozen pizzas last year.

Required:

What is the contribution margin for one frozen pizza?  What is the contribution margin ratio for frozen pizzas? What is the break even point in number of pizzas sold? What is the break even point in sales revenue? Assume Pete's Pizzas want to increase the selling price for a frozen pizza to $6.50, but they expect sales to fall by 10% as a result. Should Pete's Pizzas increase the price or not? Support your answer with a recalculated break even point in pizzas sold.

Answer 1

Part 1)

Contribution margin = sales - variable cost

= 6.1 - (1+.05+1.1+.5+.1+1.5)

= $ 1.85

Part 2)

Contribution Margin Ratio

= Contribution margin / sales *100

= 1.85/6.1*100

= 30. 33 %

Part 3)

Break Even Point in number of pizzas = fixed cost / contribution margin per unit

= (35000+14000)/1.85

= 26486 units (rounded off to 0 decimal places)

Part 4)

Break even point in sales revenue

= fixed costs / contribution margin ratio

= ( 35000+14000)/30.33%

= $161568

Part 5)

Net benefit = increased contribution margin - decrease in contribution margin due to decrease in sales

= ((6.5-6.1)*36000*90%) - (1.85*36000*10%)

= $ 6300

Yes it should increase the price as it leads to financial advantage

Support

Break even point in pizza

= fixed cost / revised contribution margin

= 49000/(1.85+.4)

= 21778 units

Since break even has decraesed, it should increase the selling price.

answered by: anonymous