A large hotel-casion in Las Vegas is currently under construction. There will be

Question

A large hotel-casion in Las Vegas is currently under construction. There will be an Italian restaurant in the hotel that will serve pizza. Management is trying to decide whether to make the pizza themselves or buy it frozen and simply heat it to customer order. There are two major sources of commercial-grade frozen pizza: Ma Ma's products and the Chun-Yee Corporation. If they make the pizza themselves a substantial amount of preparation equipment will be required, along with skilled personnel. Frozen pizza needs either a conventional oven (MA MA's) or a microwave (Chun-Yee)/ Financial data below (variable costs are estimated based on an average pizza purchase) Make in-house - Fixed cost=$7,870/year Variable cost=$3.20 Ma Ma's - Fixed cost=$860/year Variable cost=$5.60 Chun-Yee - Fixed cost=$2,460/year Variable cost=$4.50 a.) At what volume is either Ma Ma's or Chun-Yee acceptable? b.) At what volume is the company indifferent to either Chun-Yee or make in-house?

Explanation / Answer

x= quantity of pizza

a) comparing Chun-Yee and Mama's

2460 + 4.5x = 860 + 5.6x .........Total cost per year would be same in both cases

so, x = 1454.5 = 1454 pizza = Number of acceptable pizza either from mama's or Chin-yee

b) Comparing make in house and Chun-Yee,

7870 + 3.2x = 2460 + 4.5x..............Total cost per year would be same in both cases

so, x=4161.5 = 4161 pizza = Number of acceptable pizza either form make in house or Chin-yee

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