(25 points) Sarah is the owner of Mama\'s Pizza. She is considering a new oven i

Question

(25 points) Sarah is the owner of Mama's Pizza. She is considering a new oven in which to bake the Pizzerias' signature dish, vegetarian pizza. Oven type A can handle 25 pizzas an hour. The fixed costs associated with oven A is $25,000 and th variable cost is $2.50 per pizza. Oven B is larger and can handle 45 pizzas an hour. The fixed costs associated with oven B is $34,000 with a variable cost of $1.40 per pizza. This means that: TCA 25,000 2.5 X and TCB 34,000 1.40 X The pizzas sell for $15 each 1. a. What is the break-even quantity and sale 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. Compute the cross-over point and discuss what it means.

Explanation / Answer

Answer to question A :

Let the breakeven quantity as follows :

For oven 1 : N1

For oven 2 : N2

Sell Price for Pizza = $15 each

Therefore ,

Total revenue for oven 1 = $15.N1

Total revenue for oven 2 = $15.N2

At Breakeven point , Total Revenue = Total cost

Therefore ,

For Oven 1 :

15.N1 = 25000 + 2.5.N1

Or, 12.5.N1 = 25000

Or, N1 = 2000

Breakeven quantity = 2000 Pizzas

Breakeven sale = $ 15 x 2000 = $30,000

For oven 2 :

15.N2 = 34000 + 1.4.N2                                                                                                                                                                                

Or, 13.6,N2 = 34000

Or. N2 = 34000/13.6

Or, N2 = 2500

Breakeven quantity = 2500 Pizzas

Breakeven sale = $ 15 x 2500 = $37,500

Answer to question B :

Cost for 9000 Pizzas:

In oven 1 = 25000 + 2.5 x 9000 = 25000 + 22500 = $47500

In oven 2 = 34000 + 1.4 x 9000 = 34000 + 12600 = $46600

Since cost of making Pizza in oven 2 ( $ 46600 ) < Cost of making Pizza in oven 1 ( $ 47500) , oven 2 must be purchased

SHE SHOULD PURCHASE OVEN 2

Answer to question C :

Cost for 12000 Pizzas:

In oven 1 = 25000 + 2.5 x 12000 = 25000 + 30000 =$ 55000

In oven 2 = 34000 + 1.4 x12000 = 34000 + 16800 = $50800

Since cost of making Pizza in oven 2 ( $ 50800 ) < Cost of making Pizza in oven 1 ( $ 55000) , oven 2 must be purchased

SHE SHOULD PURCHASE OVEN 2

Answer to question D :

   Let the crossover point be X

Crossover point is the volume , below which making pizza in oven A works out cheaper than oven B . Costs of making pizza at both ovens work out same at crossover point .

25000 + 2.5.X < 34000 + 1.4.X

Or, 1.1.X <9000

Or, X < 9000/1.1

Or, X < 8181.81

Therefore , we can conclude that crossover point is 8181 . which means :

SHE SHOULD PURCHASE OVEN 2

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