Randy's Pizza delivers pizzas to dormitories and apartments near a major state university. The company's annual fixed costs are $48,000. The sales price averages $9, and it costs the firm $3 to make and deliver each pizza.Required: 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.
What will be an ideal response?
A.
| Selling price per pizza | $9 |
| Less: Variable cost per pizza | 3 |
| Unit contribution margin | $6 |
| ? | ? |
| Break-even pizzas: $48,000 ÷ $6 = 8,000 | ? |
C. Safety margin: (9,900 × $9) - (8,000 × $9) = $17,100
D. The contribution margin is the amount that each unit (pizza) contributes toward covering fixed cost and producing a profit. Once a company's fixed costs are covered, operating income will increase by the amount of the contribution margin. Mathematically, it is computed as the difference between selling price and the variable cost per unit.
Business
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