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

Question

Janelle Heinke, the owner of Ha'Peppas!, is considering a new overn in which to bake the firm's singature dish, vegetarian pizza. Oven type A can handle 20 pizzas an hour. The fixed costs associated with Oven type A are $20,000 and the variable costs are $2.00 per pizza. Oven B is larger and can handle 40 pizzas an hour. The fixed costs associated with oven B are $30,000 and the variable costs are $1.25 per pizza. The pizzas sell for $14 each.

a) what is the brerak-even point for each oven?

b) if the owner expects to sell 9,000 pizzas, which oven should she purchase?

c) if the owner expects to sell 12,000 pizzas, which oven should she purchase?

d) at what volume should Janelle switch ovens?

Explanation / Answer

a)

b)

So, at 9,000 level, Oven A should be selected as it is giving more profit.

c)

So, at 12,000 level also, Oven A should be selected as it is giving more profits.

d)

The ovens will be switched over at a level when profit from both will be equal. Let that level of production be X.

So, to make profits from both equal, we equate both the equations and solve for X:

Profit = Contribution - Fixed Costs

So, 12X - 20,000 = 12.75X - 30,000

So, 0.75X = 10,000

So, X = 13,334 (rounded off to higher number)

So, the switch over level is 13,334 pizzas.

Oven A Oven B Fixed Costs          20,000          30,000 Sales                  14                  14 Less: Variable costs                    2                    1 Contribution per unit                  12                  13 Break Even Point (Fixed Costs/Contribution per unit) 1667 2353

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