ACC502: Operations Management Accounting

Question

Five-Star Pizza delivers pizzas to the residential halls and units near a major university. The company's annual fixed expenses are $40,000. The sales price of a pizza is $16, and it costs the company $8 to make and deliver each pizza.

Required:

a) Calculate the company's break-even point in units (pizzas). (1 mark)

b) What is the contribution margin ratio? (1 mark)

c) Calculate the break-even sales revenue. Use the contribution margin ratio in your calculation. (1 mark)

d) Explain the concept of 'break-even' point and justify your answers in requirements (a) and (c) above, with the calculation using contribution margin format of income statement. (3 marks)

e) How many pizzas must the company sell to earn a target net profit of $50,000? (Ignore income taxes). (1 mark)

f) How many pizzas should Five-Star Pizza sell in order to make a $60000 net profit after tax? Assume that the tax rate is 25%. (1 mark)