Pizza Palace is a restaurant chain with operations across North America. The company operates using typical fast food operations, however is considering adding food trucks in order to increase business. Below is the CVP Income statement for Pizza Palace for the 1st quarter of 2020.  

Pizza Palace would like to remain using the same supplier for its dough; however, the supplier is increasing its prices by $1/pound of dough. Each pound of dough makes 4 small pizzas (Hint: You will need to convert price per pound of dough to price per individual pizza.) Due to recent growth, Pizza Palace has decided to hire a new head chef that would cost the company $25,000 per quarter for the new position’s salary, as well additional kitchen space for an annual rent of $100,000 per year.

The company believes that it can reduce variable marketing expenses by $0.08 per pizza by increasing fixed marketing expenses by $35,500. With this new marketing scheme, the company believes it can generate a 8% increase in sales volume all the while keeping the price of each pizza at $5.50.  

The company wants to put these changes into place by the third quarter of 2020; however, it needs to answer a few questions internally before it decides to move forward.  

1. Management wants to obtain an understanding of the current situation before any changes are implemented. Calculate the following:

a. Find the unit contribution margin as well as the contribution margin ratio before the changes are implemented.  

b. Find the breakeven point in pizzas (units) and in sales dollars before the changes are implemented. Round the answers up to the next whole number.

c. Find the new unit contribution margin as well as the contribution margin ratio after the changes are implemented.  

d. Find the new breakeven in pizzas (units) and in sales dollars after the changes are implemented. Round the answers up to the next whole number.  

2. Based on the new cost structure, how many pizzas would the company need to sell to maintain an operating profit of $632,200? Round the answer up to the next whole number.  

3. Prepare a memo to the company’s Management explaining the following: What is the impact on the company’s Operating Income based on the above changes? Should the company proceed with all the changes? If yes, why? If no, what changes would you suggest if the company wants to stay with its current dough supplier?  

4. Another option for the company is to expand to another city under its current operating model of only selling one kind of pizza. In order to expand to another city, the company has decided that it will need to invest in an aggressive marketing campaign in the new city. The marketing campaign will cause another $425,000 in fixed marketing expenses to be incurred for the 1st quarter 2020. The company will also need to hire a new manager to run the new city’s operations at a quarterly salary cost of $35,500.

Pizza Palace

CVP Income Statement

For the Quarter Ended March 31, 2020

City A City B Total

Sales Revenue ($5.50 per pizza) $5,098,500 $2,475,000 $7,573,500 Less Variable Expenses:

Cost of Goods Sold $3,104,500 $1,507,500 $4,612,000 Marketing Expenses 557,000 270,000 827,000 General & Administrative Expenses 157,600 76,500 234,100 Contribution Margin $1,279,400 $621,000 $1,900,400

a. Based on this above information related to the possible expansion of the company, what is the impact to operating income as compared to the original Income Statement given on Page 1?  

b. What is the new breakeven in sales dollars?

c. Pizza Palace would like to ultimately have a total target profit of $1,000,000. How many pizzas must it sell to meet this target profit? Note: Round pizzas up to the whole pizza.

Pizza Palace CVP Income Statement For the Quarter Ended March 31, 2020 Sales Revenue ($5.50 per pizza) Less Variable Expenses: Cost of Goods Sold Sales & Marketing Expenses General & Administrative Expenses $5,098,500 $3,104,500 557,000 157,600 3.819,100 Contribution Margin $1,279,400 Less Fixed Expenses: Sales & Marketing Expenses General & Administrative Expenses Operating Income $370,000 277,200 647,200 $632,200