University Pizza delivers pizzas to the dormitories and apartments near a major

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.

Explanation / Answer

Contribution per unit=Sales price- Variable cost per unit

                                 =10-2=8

1.Break even point in units= Fixed cost/ Contribution per unit

                                         =68,000/8=8,500 units

2. Contribution Margin Ratio=8/10 x 100=80%

3.Break even sales in $= Fixed cost/ Contribution Margin Ratio

                                      =68,000/80%

                                      =$85,000

4. Target sales in units=Target Profit+ Fixed Cost/ Contribution per unit

                                     =74,000+68,000/8

                                      =142,000/8

                                       =17,750 units

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