Question 3 (Total 15 marks) Pizza Home is considering to buy a new oven to expand their pizzas business . Oven type A can handle 20 pizzas an hour. The fixed costs associated with oven A are $20,000 and variable costs are $2.00 per piece of pizza . Oven type B is larger, and can handle 40 pizzas an hour. The fixed costsI associated with oven B are $30,000 and variable costs are $1.25 per piece of pizza . The pizzas are sold at $14 per piece . a) What is the breakeven point in terms of piece of pizza for each oven ? (2 marks ) b) If the owner expects to sell 9,000 pieces , which oven should he purchase ? (3 marks ) C) If the owner expects to sell 12,000 pieces ,which oven should he purchase ? (3 marks ) d) Due to market situation ,the selling price is now reduced to $12 per piece ,then how are the breakeven points of oven A and B be affected? (2 marks ) e) If you were the owner of Pizza Home , besides breakeven point analysis what other factms should you consider to make a better comparison between oven A and B? Suggest five of them . (5 marks )

SOLUTION

Step-by-step explanation

a. What is the break ? even point (BEP) for each oven?

BEP= Fixed Cost/ Contribution per unit

Contribution= Sales-Variable cost

So, BEP for Oven A = 20000/(14-2)= 1667 pizzas

BEP for Oven B= 30000/(14-1.25) = 2353 pizzas

b. If the owner expects to sell 9,000 pizzas, which oven should she purchase?

Profit for oven A = (9000*14)-(20000+2*9000) = 88,000

Profit for oven B = (9000*14)-(30000+1.25*9000)=84750

The owner should purchase oven A as it has higher profit.

c. If the owner expects to sell 12,000 pizzas, which oven should she purchase?

Profit for oven A = (12000*14)-(20000+2*12000)=124,000

Profit for oven B = (12000*14)-(30000+1.25*12000)=123,000

The owner should purchase oven A.

d. If the selling price reduced to $12 per piece then BEP is as follows:-

BEP for Oven A = 20000/(12-2)= 2000 pizzas

BEP for Oven B= 30000/(12-1.25) = 2791 pizzas

e.If I were the owner of Pizza Home, besides breakeven point analysis the following are the other factors should I consider to make a better comparison between oven A and B:-

• Whichever is more financial
• Usefull life of oven
• Demand based purchase
• On the basis of profits earned
• On the basis of costs incurred

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