Question

College Pizza delivers pizzas to the dormitories and apartments near a major state university. The company’s annual fixed expenses are $52,000. The sales price of a pizza is $10, and it costs the company $2 to make and deliver each pizza. (In the following requirements, ignore income taxes.)

(1) Using the contribution-margin approach, compute the company’s break-even point in units (pizzas).
(2) What is the contribution-margin ratio? (Round your answer to 1 decimal place.)
(3) Compute the break-even sales revenue. Use the contribution-margin ratio in your calculation.

Answer 1

(1) 6,500 units

(2) 80%

(3) $65,000

Step-by-step explanation:

Given that,

Annual fixed expenses = $52,000

Sales price of a pizza = $10

Cost of making and delivering a pizza = $2

Contribution margin per unit:

= Sales price - Variable Cost

= $10 - $2

= $8

(1) company’s break-even point in units:

= Annual fixed expenses ÷ Contribution margin per unit

= $52,000 ÷ $8

= 6,500 units

(2) Contribution-margin ratio:

= (Contribution margin per unit ÷ Sales price) × 100

= ($8 ÷ $10) × 100

= 80%

(3) Break-even sales revenue:

= Fixed cost ÷ Contribution-margin ratio

= $52,000 ÷ 80%

= $65,000