Question

University Pizza delivers pizzas to the dormitories and apartments near a major state university. The company’s annual fixed expenses are $68,000. The sales price of a pizza is $10, and it costs the company $2 to make and deliver each pizza. (In the following requirements, ignore income taxes.)
Required:

1. Using the contribution-margin approach, compute the company’s break-even point in units (pizzas).

2. What is the contribution-margin ratio? (Round your answer to 1 decimal place.)

3. Compute the break-even sales revenue. Use the contribution-margin ratio in your calculation.

4. How many pizzas must the company sell to earn a target net profit of $74,000? Use the equation method

Answer 1

Explanation:

The computation is as follows

1. The break even point in units are as follows:

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

where,  

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

So, the break even point in units is

= ($68,000) ÷ ($10 - $2)

= $68,000 ÷ $8

= 8,500 units      

2. The contribution margin ratio is

Contribution margin ratio = (Contribution margin per unit) ÷ (selling price per unit) × 100  

So, the ratio = ($8) ÷ (10) × 100

                    = 80%

3. The break even sales revenue is

= Annual fixed expenses ÷ contribution margin ratio

= $68,000 ÷ 80%

= $85,000

4. Now the target sales in units is

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

= ($68,000 + $74,000) ÷ ($8)

= $17,750 units