The owner of Miller Restaurant is disappointed because the r

The owner of Miller Restaurant is disappointed because the restaurant has been averaging 7,500 pizza sales per month but the restaurant and wait staff can make and serve 10,000 pizzas per month. The variable cost (for example, ingredients) of each pizza is $1.55. Monthly fixed costs (for example, depreciation, property taxes, business license, manager\'s salary) are $12,000 per month. The owner wants cost information about different volumes so that some operating decisions can be made.

REQUIREMENTS:

1.) Fill in the following chart to provide the owner with the cost information. Then use the completed chart to help you answer the remaining questions:

2.) From a cost standpoint, why do companies such as Miller Restaurant want to operate near or at full capacity?

3.) The owner has been considering ways to increase the sales volume. The owner thinks that 10,000 could be sold per month by cutting the selling price per pizza from $6.25 to $5.75. How much extra profit (above the current level) would be generated if the selling price were to be decreased? (HINT: Find the restaurant\'s current monthly profit and compare it to the restaurant\'s projected monthly profit at the new sales price and volume.)

Monthly pizza volume 6,000 7,500 10,000 Total fixed costs Total variable costs Total costs Fixed cost per pizza Variable cost per pizza Average cost per pizza Selling price per pizza S 6.25 S 6.25 S 6.25 Average profit per pizza

Solution

2. Break even point is the level of production where the enterprise incurrs no profit or loss. Below this point is the loss of the company, and when the company operates at higher level of production , higher the profit for the company. (Higher the level, higher is the profit).

Thus from the cost point of view , every company wants to operate at full or near full capacity to earn higher level of profit which is far away from the BREAKEVEN point. Because at this point all the fixed costs have been recovered, every additional unit adds to the profit of the company.

3. Comparison of profit at two levels

Due to additional profit of $6750 company should reduce the Selling Price and operate at level of 10000 units.

Please give your feedback!! Happy Learning :)

a) Monthly Pizza volume	6000	7500	10000
b) Total fixed costs	$12000	$12000	$12000
c) Total variable costs (a×$1.55)	$9300	$11625	$15500
d) Total costs (b+c)	$21300	$23625	$27500
e) Fixed cost per Pizza (b/a)	$2	$1.6	$1.2
f) Variable cost per Pizza	$1.55	$1.55	$1.55
g) Average cost per Pizza (e+f)	$3.55	$3.15	$2.75
h) Selling price per pizza	$6.25	$6.25	$6.25
i) Average Profit per pizza (h-g)	$2.7	$3.1	$3.5