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

1.

a. To break even, Mario needs to cover his fixed and variable costs. The contribution margin per pizza is $10 (selling price) - $4 (cost to make) = $6. The total fixed costs are $200 (rent) + $60 (advertising) + $100 (utilities) = $360. The break-even point in pizzas is $360 / $6 = 60 pizzas.

b. If he plans to sell 80 pizzas, the new selling price to break even is $360 / 80 = $4.50 per pizza.

2.

a. To make an 8% net income on sales revenue, Mario needs to sell 60 pizzas and have a net income of $10 * 0.08 = $0.80 per pizza. So, he needs to make a total net income of $0.80 * 60 = $48.

b. If he sells 80 pizzas, the new selling price to achieve an 8% net income is $4.50 + $0.80 = $5.30 per pizza.

3.

a. With reduced costs to $3.60 per pizza, the contribution margin becomes $10 - $3.60 = $6.40. To achieve an 8% net income, he needs to sell $48 / $6.40 = 7.5 pizzas, so he needs to sell 8 pizzas.

b. If he reduces advertising costs to $40 per month, the contribution margin remains $6. To achieve an 8% net income, he needs to sell $48 / $6 = 8 pizzas.

4. With free delivery and 75% of sales being delivery, Mario aims to sell 120 pizzas. The contribution margin required to achieve an 8% net income is $48 / 120 = $0.40. Since 75% are delivered, the contribution margin per delivered pizza needs to be $0.40 / 0.75 = $0.5333. To cover the delivery person's fee and achieve the desired net income, he needs to charge $10 + $0.5333 = $10.5333 per pizza.