Question

Randy’s Pizza delivers pizzas to dormitories and apartments near a major state university. The company's annual fixed costs are $58,800. The sales price averages $11, and it costs the firm $4 to make and deliver each pizza.

A. How many pizzas must Randy's sell to break even?
B. How many pizzas must the company sell to earn a target profit of $54,000?
C. If budgeted sales total 9,900 pizzas, how much is the company's safety margin in dollars?
D. Tony's assistant manager, an accounting major, has suggested that the firm should try to increase the contribution margin per pizza. Explain the meaning of "contribution margin" in layman's terms.

Answer 1

Please see answers below

Step-by-step explanation:

A. For break even point

= fixed expenses - Contribution margin per unit

Where,

Contribution margin per unit = Sales per unit - Variable cost per unit

= $11 - $4

= $7

Therefore,

Break even points in unit = $58,800 ÷ $7

= 8,400 pizzas

B. Target profit

The break even point = Fixed costs expenses + Target profit / Contribution margin per unit

= ($58,800 + $54,000) / $7

= $112,800 / $7

= 16,114 pizzas

C. Margin of safety in dollars

= (Total sales - Break even in sales) * Selling price per unit

= ( 9,900 - 8,400 ) * $11

= 1,500 * $11

= $16,500

D. Contribution margin in lay man's term.

Contribution margin is when a firm makes or produces a product and then sold it, the difference that is left after deducting variable costs(costs associated with the sales like cost of raw materials used in producing the product) from the the sales of such product is the contribution margin.