A friend of your parents owns a pizza restaurant. The owner is disappointed with his restaurants performance. Your parents tell him that you are taking Strategic Cost Accounting at Loyola and maybe you can help him figure out what might be the issue.

The restaurant sales have been averaging 3,000 pizza sales (at $10 each) per month, but the cooks and wait staff can make and serve 5,000 pizzas per month The average ingredient cost for each pizza is $2.00. Monthly costs for depreciation, property taxes, business license, managers salary and so forth are $6,000 per month.

A. First, the owner would like information at several different levels of operations: 2,500 pizzas, 3,000 pizzas, and 5,000 pizzas. Make a nice looking chart to present this information so the owner can easily interpret it. (Presentation of accounting data will be part of your job!)

B. From a cost standpoint, why would restaurants (or any business really) want to operate at near or full capacity?

C. The owner has been considering other ways to increase sales volume, such as cutting the price of pizzas to $9.50 each. He thinks could then sell 5,000 pizzas per month. Show him what might happen from this decision. How much extra profit above his current level would he generate (or lose) from dropping the sales price? Should he do this?

D. The owners other idea is to advertise his restaurant on the local radio stations. If he kept the sales price at $10 per pizza, the advertising agency claims he would have to spend $10,000 per month to increase monthly sales to 5,000 pizzas. How much extra profit above his current level would he generate (or lose) by keeping the sales price per pizza at $10 and advertising on the radio? Should he do this?

E. The owner had thought because the current average profit margin per pizza is $6.00, that the restaurant would make $30,000 of income per month (before advertising costs), if they sold 5,000 pizzas at the usual $10 per pizza. How did the owner get this figure and why is it wrong?