Question

In addition, Tony projected the following costs corresponding to sales of 4,000 and 6,000 pizzas for this year's November operation: Sales Levels Operating Cost Items 4,000 6,000 Dough $1,600 $2,400 Toppings 1,000 1,500 Cheese 2,700 1,800 1,200 Tomatoes 1,800 Energy* 2,500 3,000 3,000 Kitchen personnel Delivery personnel 3,000 1,320 880 Car expenses 2,600 2,900 Facilities* 10,000 10,000 Advertising 4,500 4,500 Total Operating Costs $29,080 $33,120 * These costs are all related to the Kitchen. Although Tony has an office at the store, the costs necessary to run this office are considered negligible (Tony uses this office only a few hours a week). Required 2. Using the November estimated data: a) Classify these costs as product or period costs. For the period costs, indicate whether these are selling expenses or general and administrative expenses. b) Classify these costs as variable, fixed, or mixed. Then, for the variable costs identify the per unit variable cost and write the total cost equation. c) Determine the contribution margin per pizza d) Determine the breakeven sales level (in number of pizzas) e) Determine the sales level (in number of pizzas) that will generate a profit of $9,000 for next November.

Price per Pizza is $10

Answer 1

2) a & b) Table showing type of costs for the given data (Amounts in $)

Operating Cost Items	Sales Levels		Cost Type					Cost Type Amounts
	4,000	6,000	Product Cost	Period Cost	Variable	Fixed	Mixed	Per Unit Variable Cost	Total Fixed Cost
Dough	1,600	2,400	X		X			0.40
Toppings	1,000	1,500	X		X			0.25
Cheese	1,800	2,700	X		X			0.45
Tomatoes	1,200	1,800	X		X			0.30
Energy	2,500	3,000	X				X	0.25 [(3,000-2,500)/(6,000-4,000)]	1,500
Kitchen Personnel	3,000	3,000	X			X			3,000
Delivery Personnel	880	1,320		S	X			0.22
Car expenses	2,600	2,900		A			X	0.15 [(2,900-2,600)/(6,000-4,000)]	2,000 [2,900 - (0.15*6,000)]
Facilities	10,000	10,000		A		X			10,000
Advertising	4,500	4,500		S		X			4,500
Total Operating Costs	29,080	33,120						2.02	21,000

Therefore total variable cost is $2.02 per unit and total fixed cost is $21,000.

Working Notes:-

i)Variable cost is the cost which remain same per unit and change in proportion to change in units. Fixed cost is the cost which remain same irrespective of change in units. Mixed cost comprises of both variable cost and fixed cost.

ii) Energy and car expenses are mixed costs and variable cost and fixed cost is separated from the given mixed cost.

Variable cost per unit from mixed cost = (Increase in mixed cost for increase in units)/Total increase in units

For example for Energy = ($3,000-$2,500)/(6,000 units - 4,000 units)

= $500/2,000 units = $0.25 per unit

Total fixed energy cost = $3,000 - ($0.25*6,000 units)

= $3,000 - $1,500 = $1,500

c) Contribution margin per pizza = Selling price per pizza - Variable cost per pizza

= $10 - $2.02 = $7.98 per pizza

Therefore contribution margin per pizza is $7.98 per pizza.

d) Break Even Sales (in units) = Total Fixed Cost/Contribution Margin per pizza

= $21,000/$7.98 per pizza = 2,632 pizzas (Rounded off)

Therefore break even sales level is 2,632 pizzas.

e) Desired Sales Level = (Total Fixed Cost+Desired Profit)/Contribution Margin per pizza

= ($21,000+$9,000)/$7.98 per pizza

= $30,000/$7.98 per pizza = 3,759 pizzas

Therefore the sales level that will generate a profit of $9,000 is 3,759 pizzas.