Question

College Pizza delivers pizzas to the dormitories and apartments near a major state university. The company‘s annual fixedexpenses are 540.000. The sales price of a pizza is S 10. and it costs the company S 5 to make and deliver each pizza. (Inthe following requirements. ignore income taxes.)Requlred:I. Using the contribution-margin approach. compute the company‘s break»even point in units (pizzas)2 What is the contribution-margin ratio?3. Compute the break-even sales revenue. Use the contribution-margin ratio in your calculation.4. How many pizzas must the company sell to earn a target net profit of 565000? Use the equation method.

Answer 1

Answer:

1. 108,000 pizzas

2. 50%

3. $1,080,000

4. 221,000 pizzas

Explanation:

The calculations are shown below:

1. For break even points in units

= (Annual Fixed expenses + target profit) ÷ (Contribution margin per unit)

where,

Contribution margin per unit = Selling price per unit - Variable expense per unit

= $10 - $5

= $5

And the other values will remain the same now place these values in the formula above.

= ($540,000) ÷ ($5)

= 108,000 pizzas

2. Contribution margin ratio

= (Contribution margin per unit ÷ Selling price per unit) × 100

= ($5) ÷ ($10) × 100

= 50%

3. Break-even sales revenue:

= Annual fixed expenses ÷ contribution margin ratio

= $540,000 ÷ 50%

= $1,080,000

4. Break even units for earns target net profit would be

= (Annual Fixed expenses + targeted net  profit) ÷ (Contribution margin per unit)

= (540,000 + $565,000) ÷ ($5)

= 221,000 pizzas

Answer 2

The solutions to the given problem are as follows:

1. The break-even point in units is 108,000.
2. The contribution margin is 50%.
3. The break-even sales revenue is $1,080,000.
4. The number of pizzas to be sold to earn a profit of $565,000 are 221,000 pizzas.

What is break-even point and contribution margin?

The break-even points refers to the point at which the company suffers neither profit nor loss. It is the point at which cost is exactly equals to revenue.

The contribution refers to the difference between the sales value and the variable costs of a product. The contribution margin is the fraction of contribution to selling price in percentage form.

Given:

The fixed cost is $540,000

The sales price of a pizza is $10

The cost of making and delivering a pizza is $5

The break-even point can be calculated as follows:

$\rm Break-even\:point = \dfrac{Fixed\:cost}{Contribution\: margin\:per\:unit }$

The contribution margin will be calculated as:

$\rm Contribution margin= Selling \:price - Variable\:cost\\\\\rm Contribution margin=\ 10 - \ 5\\\\\rm Contribution margin=\ 5$

Therefore the break-even point will be:

$\rm Break-even\:point = \dfrac{Fixed\:cost}{Contribution\: margin\:per\:unit }\\\\\rm Break-even\:point = \dfrac{\ 540,000}{\ 5}\\\\\rm Break-even\:point = 108,000 \:units$

The break-even sales revenue can be calculated as:

$\rm Break-even\:sales \:revenue = Break-even\:sales\:units \:x \: Selling\:price\\\\\rm Break-even\:sales \:revenue = 108,000\: x \:\ 10\\\\\rm Break-even\:sales \:revenue =\ 1,080,000$

The contribution margin ratio will be:

$\rm Contribution\:margin\:ratio = \dfrac{Contribution\:margin}{Selling\:price} \times 100\\\\\rm Contribution\:margin\:ratio = \dfrac{\ 5}{\ 10} \times 100\\\\\rm Contribution\:margin\:ratio = 50\%$

The calculation of sales to earn a profit of $565,000 will be as follows:

$\rm Sales = \dfrac{Fixed \:cost+ Profit}{Contribution\:margin }\\\\\rm Sales = \dfrac{(\ 540,000+\ 565,000)}{\ 5}\\\\\rm Sales = \dfrac{1,105,000}{\ 5}\\\\\\\rm Sales = 221,000\:pizzas$

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