Question

Randy’s Pizza delivers pizzas to dormitories and apartments near a major state university. The company's annual fixed costs are $32,800. The sales price averages $9, and it costs the firm $5 to make and deliver each pizza. Required: A.How many pizzas must Randy’s sell to break even? B.How many pizzas must the company sell to earn a target profit of $36,800? C.If budgeted sales total 10,100 pizzas, how much is the company's safety margin in dollars?

Answer 1

Answer:

a. 8,200 pizzas

b. 17,400 pizzas

c. $17,100

Explanation:

The computation is shown below:

a. For break even point

= (Fixed expenses ) ÷ (Contribution margin per unit)  

where,  

Contribution margin per unit = Selling price per unit - Variable expense per unit

= $9 - $5

= $4

So, the break even point is

= $32,800 ÷ $4

= 8,200 pizzas

b. For target profit

The break even point is

= (Fixed expenses + target profit) ÷ (Contribution margin per unit)  

= ($32,800 + $36,800) ÷ $4

= 17,400 pizzas

c. And, the margin of safety in dollars is

= (Total sales - break even sales) × selling price per unit

= (10,100 pizzas - 8,200 pizzas) × $9

= $17,100