Question

Page of 100 ZOOM + PINNI'S PIZZERIA Pinni's Pizzeria is a restaurant selling two types of pizzas: thin crust and deep dish. The expected selling price, variable cost and sales volume in units for 2016 are as follows: Thin Crust Deep Dish $8 $123 Selling Price per unit Variable Cost per unit Expected Sales (units) 100,000 150,000 The total fixed costs for the company are $600,000. They are common to both products. Required 1. Prepare a multi-product budgeted income statement using the contribution margin format. What is the projected operating profit for 2016? How would this prediction change if some of your customers come in groups, e.g., in families, and some family members like only thin crust and others like only deep dish? 2. How would the profit projection change if some customers of Deep Dish pizza decide to switch to Thin Crust pizza? 3. Suppose that in the next year you expect to sell only 40,000 thin crust and 100,000 deep-dish pizzas. Prepare a multi-product budgeted income statement using the contribution margin format. Explain why the profit projection in this case is different from (1). 4. Suppose in the next year you are planning to open a new store in a new neighborhood. The selling price, variable cost, and fixed costs will be the same at this new store. What is the breakeven volume for the new store?

Answer 1

1.00		Thin Crust	Deep Dish	Total
	Expected Sales	100,000.00	150,000.00	250,000.00
	Selling Price per Unit	$                     8	$                  12
	Variable cost per unit	$                     4	$                     6
	Contribution per Unit	$                     4	$                     6
	Contribution Margin Total	$        400,000	$        900,000	$             1,300,000
	Less: Fixed Cost			$                 600,000
	Operating profit prediction for 2016			$                 700,000
	If People come in groups and some like only one type of Pizza, then the sale volume and in turn operating profit should increase.
	This is because they will have to order both type of pizza together even if they could have managed with lesser number of pizzas had they ordered only one type of pizza
2.00	If come customers switch from deep Dish to Thin Crust, the operating profit will decrease and Thin crust has lower contribution margin compared to deep dish
	Thin crust earn $4 only per pizza compared to $6 earned by Deep Dish
3.00		Thin Crust	Deep Dish	Total
	Expected Sales	40,000.00	100,000.00	140,000.00
	Selling Price per Unit	$                     8	$                  12
	Variable cost per unit	$                     4	$                     6
	Contribution per Unit	$                     4	$                     6
	Contribution Margin Total	$        160,000	$        600,000	$                 760,000
	Less: Fixed Cost			$                 600,000
	Operating profit prediction for 2016			$                 160,000
	The profit projection has come down as number of units sold have reduced significantly
4.00		Thin Crust	Deep Dish	Total
	Selling Price per Unit	$                     8	$                  12
	Variable cost per unit	$                     4	$                     6
	Contribution per Unit	$                     4	$                     6
	Contribution Margin Percentage	50%	50%
	Fixed Cost			$                 600,000
	Break even sales will be			$             1,200,000	calculated as fixed cost / % contribution margin. Note that contribution margin % is same here for both the products
5.00		Thin Crust	Deep Dish	Total
	Expected Sales	100,000.00	150,000.00	250,000.00
	Selling Price per Unit	$                     8	$                  12
	Variable cost per unit	$                     4	$                     6
	Contribution per Unit	$                     4	$                     6
	Contribution Margin Percentage	50%	50%
	Contribution Margin Total	$        400,000	$        900,000	$             1,300,000
	Less: Fixed Cost	$        480,000	$        120,000	$                 600,000
	Operating profit	$        (80,000)	$        780,000	$                 700,000