Concept explainers
a)
To determine: The break-even point of each oven given.
Introduction:
Break-even point (BEP):
The break-even point is measured in units or in sales term to identify the point in a business which is required to cover the total investment costs. The total profit at break-even point is zero.
a)
Answer to Problem 20P
The break-even point of oven type A is 1,667 pizzas. The break-even point of oven type B is 2,353 pizzas.
Explanation of Solution
Given information:
Oven type A:
Number of pizzas = 20 / hour
Fixed cost = $20,000
Variable cost = $2.00 / pizza
Selling price= $14.00/ pizza
Oven type B:
Number of pizzas = 40 / hour
Fixed cost = $30,000
Variable cost = $1.25 / pizza
Selling price = $14.00 / pizza
Formula to calculate Break-even point (BEP):
Calculation of Break-even point (BEP) of oven type A:
The break-even cost of an oven is calculated by finding out the number of pizzas that an oven can cook.
The break-even point is calculated by dividing the fixed cost with the difference of selling price and variable cost.
Hence, the Break-even point (BEP) for oven type A is 1,667 pizzas.
Calculation of Break-even point (BEP) of oven type B:
The Break-even point is calculated by dividing the fixed cost with the difference of selling price and variable cost.
Hence, the Break-even point (BEP) for oven type B is 2,353 pizzas.
b)
To determine: The oven that need to be purchased if the owner is expecting to sell 9,000 pizzas.
b)
Answer to Problem 20P
The oven that needs to be purchased if the owner is expecting to sell 9,000 pizzas is oven type A.
Explanation of Solution
Given information:
Oven type A:
Number of pizzas = 20 / hour
Fixed cost = $20,000
Variable cost = $2.00 / pizza
Selling price = $14.00 / pizza
Oven type B:
Number of pizzas = 40 / hour
Fixed cost = $30,000
Variable cost = $1.25 / pizza
Selling price = $14.00 / pizza
Formula to calculate Profit:
Calculation of profit for oven type A:
The profit is calculated by multiplying number of selling pizzas with selling price and the resultant value is subtracted from the fixed cost and the value obtained by multiplying number of selling pizzas and variable cost.
The profit for oven type A is $88,000.
Calculation of profit for oven type B:
The profit is calculated by multiplying number of selling pizzas with selling price and the resultant value is subtracted from the fixed cost and the value obtained by multiplying number of selling pizzas and variable cost.
The profit for oven type B is $84,750.
The profit of oven type A is more than oven type B. (88,000 > 84,750)
Hence, the owner must purchase type A oven.
c)
To determine: The oven that need to be purchased if the owner is expecting to sell 12,000 pizzas.
c)
Answer to Problem 20P
The oven that needs to be purchased if the owner is expecting to sell 12,000 pizzas is oven type A.
Explanation of Solution
Given information:
Oven type A:
Number of pizzas = 20 / hour
Fixed cost = $20,000
Variable cost = $2.00 / pizza
Selling price = $14.00 / pizza
Oven type B:
Number of pizzas = 40 / hour
Fixed cost = $30,000
Variable cost = $1.25 / pizza
Selling price = $14.00 / pizza
Formula to calculate Profit:
Calculation profit for oven type A:
The profit is calculated by multiplying number of selling pizzas with selling price and the resultant value is subtracted from the fixed cost and the value obtained by multiplying number of selling pizzas and variable cost.
The profit for oven type A is $124,000.
Calculation profit for oven type B:
The profit is calculated by multiplying number of selling pizzas with selling price and the resultant value is subtracted from the fixed cost and the value obtained by multiplying number of selling pizzas and variable cost.
The profit for oven type B is $123,000.
The profit of oven type A is more than oven type B. (124,000 > 123,000)
Hence, the owner must purchase type A oven.
d)
To determine: The volume of pizzas at which JE person must switch the ovens.
d)
Answer to Problem 20P
The volume of pizzas at which JE person must switch the type of ovens is 13, 333 pizzas.
Explanation of Solution
Given information:
Oven type A:
Number of pizzas = 20 / hour
Fixed cost = $20,000
Variable cost = $2.00 / pizza
Selling price = $14.00 / pizza
Oven type B:
Number of pizzas = 40 / hour
Fixed cost = $30,000
Variable cost = $1.25 / pizza
Selling price = $14.00 / pizza
Formation of equation 1 for oven type A:
Formation of equation 2 for oven type B:
Calculation of volume of pizzas:
The volume of pizzas is calculated by substituting all the known values in equation (1) and (2) and equating each other.
Hence, the volume of pizzas at which JE person must switch the type of ovens is 13, 333 pizzas.
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Chapter 7 Solutions
EBK PRINCIPLES OF OPERATIONS MANAGEMENT
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