Janelle Heinke, the owner of Ha\'Peppas!, is considering a new oven in which to

Question

Janelle Heinke, the owner of Ha'Peppas!, is considering a new oven in which to bake the firm's signature dish, vegetarian pizza. Oven type A can handle 24 pizzas an hour. The fixed costs associated with oven A are $25,000 and the variable costs are $2.50 per pizza. Oven B is larger and can handle 44 pizzas an hour. The fixed costs associated with oven B are $32,500 and the variable costs are $1.25 per pizza. The pizzas sell for $14.00 each. a) The break-even point in units for oven type A- 2174 units (round your response to the nearest whole number). The break-even point in units for oven type B 2549 units (round your response to the nearest whole number). b) If Janelle is expecting that the pizza shop is going to be able to sell 9,000 pizzas, then she should select oven B c) If Janelle is expecting that the pizza shop is going to be able to sell 13,000 pizzas, then she should select oven B d) The volume at which Oven A and Oven B have the same cost (crossover point) and Janelle would be indifferent -pizzas (rnound your response to the nearest whole number).

Explanation / Answer

For oven A

For oven B

Selling price (SP) = $14.00

a) Break even point for oven A = FC/(SP-VC) = 25000/(14.00-2.50)= 25000/11.5 = 2174 units

Break even point for oven B = FC/(SP-VC) = 32500/(14.00-1.25) = 32500/12.75 = 2549 units

b) If the volume of output (Q) = 9000 pizzas,

Profit from oven A = Q(SP-VC) - FC

= 9000(14.00-2.50)-25000

= (9000 x 11.5)-25000

= 103500-25000

= $78500

Peofit from oven B = Q(SP-VC) - FC

= 9000(14.00-1.25)-32500

= (9000 x 12.75)-32500

= 114750-32500

= $82250

So if the expected sales is 9000 pizzas she should select oven B as it has a higher profit

C) If the volume of output (Q) = 13000 pizzas,

Profit from oven A = Q(SP-VC) - FC

= 13000(14.00-2.50)-25000

= (13000 x 11.5)-25000

= 149500-25000

= $124500

Profit from oven B = Q(SP-VC) - FC

= 13000(14.00-1.25)-32500

= (13000x12.75)-32500

= 165750-32500

= $133250

So if the expected sales is 13000 pizzas she should select oven B as it has a higher profit

d) The cross over point is the point where both the ovens will have the same total cost. So the volume at which both the oven have the same cost can be calculated using the following equation

Let the volume of output = Q

Total cost for oven A = Total cost for oven B

=> FC+(Q x VC) = FC+(Q x VC)

=> 25000+(Q x 2.50) = 32500 + (Q x 1.25)

=> 25000 + 2.50Q = 32500 + 1.25Q

=> 2.50Q-1.25Q = 32500-25000

=> 1.25Q = 7500

=> Q = 7500/1.25

=> Q = 6000 pizzas

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