The local convenience store makes personal pan pizzas. Currently, their process

Question

The local convenience store makes personal pan pizzas. Currently, their process makes complete pizzas, fully cooked, for the customer. This process has a fixed cost of $20,000, and a variable cost of $2.00 per pizza. The owner is considering a different process that can make pizzas in two ways: completely cooked (as before), or partially cooked and then flash frozen, for the customer to finish at home. This alternate process has a fixed cost of $24,000, but a lower variable cost (because much less energy is used in baking) of $1.50 per pizza.

a. What is the crossover point between the existing process and the proposed process?

b. If the owner expects to sell 9,000 pizzas, should he get the new oven?

Explanation / Answer

a) crossover point will be at units of pizza where total cost under both will be same under both

so let x be cross over point

therefore 20000+ 2*x = 24000 + 1.5X

or 0.5x = 4000

or x = 8000

so when 8000 pizzas are sol the cost under both method would be same.

b)at 9000 Pizza

Cost under old method = 20000 + 2*9000 = 38000

Cost under new method = 24000 + 1.5*9000 = 37500

So total cost be reduced and new oven should be purchased.

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