During the third year of operations, Big Al’s estimates that 415,000 pizzas (385,000 meat and 30,000 veggie) will be produced. Direct material costs per unit are $.74 per meat pizza and $.62 per veggie pizza. Direct labor costs are $2.51 per meat pizza and $2.78 per veggie pizza. Monthly fixed selling and administrative costs are $15,300 while monthly fixed manufacturing overhead is $2,851. The variable overhead cost is $.55 per pizza. The sales price for veggie pizzas is $5.25 per pizza and the sales price for meat pizzas is $5.00.
Required:
A. Compute the break-even point in year 3 for Big Al’s pizzas. How many veggie and meat pizzas must be sold in order to break even?
B. What options does Big Al’s have to reduce the break-even point? Discuss both the quantitative and the qualitative factors that must be considered with each option.
C. How many meat and veggie pizzas, respectively, would Big Al’s need to sell in year 3 to earn a before-tax profit of $150,000?
D. If its tax rate is 30 percent, how many a pizza does Big Al’s need to sell in year 3 to earn an after-tax profit of $150,000?
E. How will the break-even point change if the sales mix changes to 80 percent meat pizzas and 20 percent veggie pizzas?
F. What would happen to the break-even point if labor costs increased by 10 percent?
G. What would happen to the break-even point if Big Al’s increases the sales price of veggie pizzas to $5.50 and meat pizzas to $5.25?