The owner of

New Jersey

Restaurant is disappointed because the restaurant has been averaging

4,000

pizza sales per month, but the restaurant and wait staff can make and serve

5,000

pizzas per month. The variable cost (for example, ingredients) of each pizza is

$1.15.

Monthly fixed costs (for example, depreciation, property taxes, business license, and manager's salary) are

$4,000

per month. The owner wants cost information about different volumes so that he can make some operating decisions.

Requirement 1. Fill in the chart to provide the owner with the cost information he wants. Then use the completed chart to help you answer the remaining questions. (Round total variable costs to the nearest dollar. Round costs per pizza, price per pizza, and profit per pizza to the nearest cent.)

	Monthly pizza volume	2,000	4,000	5,000
	Total fixed costs
	Total variable costs
	Total costs
	Fixed cost per pizza
	Variable cost per pizza
	Average cost per pizza
	Sales price per pizza	$5.75	$5.75	$5.75
	Average profit per pizza

Requirement 2. From a cost standpoint, why do companies such as

New Jersey

Restaurant want to operate near or at full capacity?

Companies want to run at full capacity to better utilize the resources they spend on

average

fixed

variable

costs. The more units they produce, the

higher

lower

the

average fixed cost

average variable cost

sales price

variable cost

per unit.

Requirement 3. The owner has been considering ways to increase the sales volume. He believes he could sell

5,000

pizzas a month by cutting the sales price from

$5.75

a pizza to

$5.25.

How much extra profit (above the current level) would he generate if he decreased the sales price?

(Hint:

Find the restaurant's current monthly profit and compare it to the restaurant's projected monthly profit at the new sales price and volume.)

Identify the profit formula and compute the monthly profit at the current and the new volume.

=

Monthly profit

Part 4

4,000 pizzas

=

Part 5

5,000 pizzas

=

Part 6

Since the restaurant will generate

a lower profit

an additional profit

of

$enter your response here,

the owner should

decrease

increase

not change

the sales price to

decrease

increase

not change

the volume.