Question

1. Your best friend, Mario, makes the most awesome pizza in town! He’s decided to open a pizza shop and needs some advice. He expects his pizzas to cost about $4 to make and he plans to sell them for $10 apiece. He’s going to rent a small space for cooking, which will cost him $200 per month. He also plans to spend $60 per month on advertising. Utilities for his space are expected to be $100 per month.

a. How many pizzas must he sell each month to break even under these conditions?

b. If he is confident that he can sell 80 pizza per month, how much must he charge for each pizza to break even?

2. a. Using the information in (1a), above, how many pizzas must he sell to make 8% net income on his sales revenue?

b. Using the information in (1b), above, how much must he charge per pizza to make 8% net income on his sales revenue?

3. a. Mario isn’t comfortable with the current numbers. He thinks he can reduce his costs to $3.60 per pizza.
a. If he does this and keeps his sales price at $10 per pizza, how many must he now sell to make a net income of 8%?
b. Instead, if he were to maintain his quality ingredients and reduce his advertising costs to $40 per month, how many pizzas must he sell to make his desired net income of 8%?

4. Mario has decided to offer free delivery for his pizzas. He has persuaded you to be his delivery person. You will get $1.50 for every pizza you deliver. He expects 75% of his sales to be delivery. All other costs will remain constant. As a result of the increased demand, he is sure he can sell 120 pizzas per month. If he still wants to achieve a net income of 8% of his sales and pizza prices are the same whether or not they are delivered, how much must he charge per pizza?

Answer 1

To break even, Mario needs to sell 60 pizzas per month. To break even with 80 pizzas, he must charge $10.38 per pizza. To make an 8% net income, Mario needs to earn $33.60. By maintaining quality ingredients and reducing advertising costs, he needs to sell 51 pizzas. If 75% of sales are delivery, Mario must charge $16.13 per pizza.

Step-by-step explanation:

To determine the break-even point, we need to calculate the total fixed costs and the contribution margin per pizza. The fixed costs include the rent, advertising, and utilities, which total $360 per month. The contribution margin is the selling price per pizza minus the variable cost per pizza, which is $10 - $4 = $6. Therefore, to break even, Mario needs to sell 60 pizzas per month ($360 divided by $6).

If Mario is confident he can sell 80 pizzas per month, we can calculate the new selling price to break even. Let x be the new selling price. The equation would be: 80(x - $3.60) = $360. Solving for x, we find that Mario must charge $10.38 per pizza to break even.

To make an 8% net income on his sales revenue, Mario needs to determine the target net income. Let TNI be the target net income. The equation would be: 60($10 - $3.60) = 0.08(TNI). Solving for TNI, we find that the target net income is $33.60. Therefore, Mario needs to earn $33.60 in net income.

If Mario maintains the quality ingredients and reduces advertising costs to $40 per month, the total fixed costs would be $340 per month. The equation to find the number of pizzas to make 8% net income would be: x($10 - $3.60) = 0.08($340). Solving for x, we find that Mario needs to sell 51 pizzas to make the desired net income.

If Mario offers free delivery and expects 75% of his sales to be delivery, we can calculate the number of delivery pizzas sold. 75% of 120 pizzas is 0.75(120) = 90 pizzas. To determine the new selling price to achieve an 8% net income, let y be the new selling price. The equation would be: 90(y - $3.60) = 0.08(120($10)). Solving for y, we find that Mario must charge $16.13 per pizza.