Basic CVP analysis: retailer
University Pizza delivers pizzas to the residential colleges and flats near a major university. The company's annual fixed costs are $54 000. The sales price of a pizza is $10, and it costs the company $6 to make and deliver each pizza. (In the following requirements, ignore income taxes.)
Required:
1. Using the contribution margin approach, calculate the company's break-even point in units (pizzas).
2. What is the contribution margin ratio?
3. Calculate the break-even point in sales dollars. Use the contribution margin ratio in your calculation.
4. How many pizzas must the company sell to earn a target net profit of $60 000? Use the CVP equation.
Special order: manufacturer
Global Chemical Company (GCC) recently received an order for a product that it does not normally produce. Since the company has spare production capacity, management are considering accepting the order. In analysing the decision, the assistant accountant is compiling the relevant costs of producing the order. Production of the special order would require 8000 kilograms of theolite. Global Chemical Company does not use theolite for its regular product, but the firm has 8000 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for $14 500. The carrying amount of the theolite is $2 per kilogram. Global Chemical Company could buy theolite for $2.40 per kilogram.
Required:
1. What is the relevant cost of theolite for the purpose of analysing the special order decision?
2. Discuss each item of numerical data given in the exercise with regard to its relevance in making the decision.