your company thinkis it will sell 5000 pizzas per year and is considering two di
ID: 445705 • Letter: Y
Question
your company thinkis it will sell 5000 pizzas per year and is considering two different locarions. location A has fixed cost of $100,00 and a viriable cost if $4 per pizza. Location B has a higher fixed cost of $125,000, but more efficient facilities that reduces the variable cost to $3 per pizza. if each pizza sells for $8 then:
A. what location should be selected using break even method ?
B. what is the point of indifference? ( how many pizza must be sold for eacg location to be wqual in cost?)
Explanation / Answer
Break evn Point for A = Fixed Cost / ( Selling Price Per unit - Variable Cost per Unit)
= 10000 / (8 - 4) = 2500
Cost for 5000 unit = 10000+ 4*5000 = $30000
Break evn Point for B = Fixed Cost / ( Selling Price Per unit - Variable Cost per Unit)
= 125000 / (8-3) = 25000
Cost for 5000 unit = 125000 + 5000*3 = 1,40,000
Location A should be selected using break even method.ed Total Cost is low for Location A.
Total Cost = Fixed Cost (FC) + (Variable Cost (VC) * Quantity(Q))
(b) Point of Indifference
FC + VC*Q = FC + VC*Q
10000 + 4Q = 125000 +3Q
Q = 115,000
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