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OBJ. 5 PR 4-5BSales mix and break-even sales Data related to the expected sales of two types of frozen pizzas for Delicious Frozen Foods Inc. for the current year, which is typical of recent years, are as follows 1.1,125 units Products 12" Pizza 16" Pizza Unit Selling Price 8.00 10.00 Unit Variable Cost $2.00 3.00 Sales Mix 60% 40% The estimated fixed costs for the current year are $26,400 instructions 1. Determine the estimated units of sales of the overall product nccessary to reach thec break-even point for the current year 12" pizza and 16" pizza for the current year the break-even point with that in part (1). Why is it so different? 2. Based on the break-even sales (units) in part (1), determine the unit sales of both the Assume that the sales mix was 40% 12" pizza and 60% 16" pizza. Compare CP 4-2 Break-even sales, contribution margin For a student, a grade of 65 percent is nothing to write home about. But for the airline lindustryl, filling 65 percent of the seats.is the difference between profit and loss The leconomyl might be just strong enough to sustain all the carriers on a cash basis but not strong enough to bring any significant profitability to the industry... . For the air- lines..., the emphasis will be on trying to consolidate routes and raise ticket prices... " The airline industry is notorious for boom and bust cycles. Why is airline profit ability very sensitive to these cycles? Do you think that during a down cycle the strategy to consolidate routes and raise ticket prices is reasonable? What would make this strategy succeed or fail? Why? Source: Edwin McDowell, "Empty Seats, Empty Beds, Empty Pockets," The New York Times January 6, 1992, p. C3

Answer 1

Answer to Question PR 4-5B:

Part 1.

12” Pizza:
Contribution Margin per Unit = Selling Price per Unit – Variable Cost per Unit
Contribution Margin per Unit = $8.00 - $2.00
Contribution Margin per Unit = $6.00

16” Pizza:
Contribution Margin per Unit = Selling Price per Unit – Variable Cost per Unit
Contribution Margin per Unit = $10.00 - $3.00
Contribution Margin per Unit = $7.00

Combined Contribution Margin per unit = ($6.00 * 60%) + ($7.00 * 40%)
Combined Contribution Margin per unit = $3.60 + $2.80
Combined Contribution Margin per unit = $6.40

Overall Break Even Point = Fixed Cost / Combined Contribution Margin per unit
Overall Break Even Point = $26,400 / 6.40
Overall Break Even Point = 4,125 Units

Therefore, 4,125 Units are overall required to attain Break Even Point for the current year.

Part 2.

Break Even Sales Unit of 12” Pizza = 4,125 * 60%
Break Even Sales Unit of 12” Pizza = 2,475 Units

Break Even Sales Unit of 16” Pizza = 4,125 * 40%
Break Even Sales Unit of 16” Pizza = 1,650 Units

Part 3.

12” Pizza:
Contribution Margin per Unit = Selling Price per Unit – Variable Cost per Unit
Contribution Margin per Unit = $8.00 - $2.00
Contribution Margin per Unit = $6.00

16” Pizza:
Contribution Margin per Unit = Selling Price per Unit – Variable Cost per Unit
Contribution Margin per Unit = $10.00 - $3.00
Contribution Margin per Unit = $7.00

Combined Contribution Margin per unit = ($6.00 * 40%) + ($7.00 * 60%)
Combined Contribution Margin per unit = $2.40 + $4.20
Combined Contribution Margin per unit = $6.60

Overall Break Even Point = Fixed Cost / Combined Contribution Margin per unit
Overall Break Even Point = $26,400 / 6.60
Overall Break Even Point = 4,000 Units

Therefore, 4,000 Units are overall required to attain Break Even Point for the current year.

Break Even Point in part 3 is different from part 1. Due to different in sales proportion of products.