3 The local convenience store makes personal pan pizzas Curr

3) The local convenience store makes personal pan pizzas. Currently, their oven car produce 50 pizzas per hour. It has a fixed cost of $2,000, and a variable cost of S0.25 per pizza. The owner is considering a bigger oven that can make 75 pizzas per hour It has a fixed cost of S3,000, but a variable cost of $0.20 per pizza. a) At what quantity do the two ovens have equal costs? b) If the owner expects to sell 9,000 pizzas, should he get the new oven?

Solution

a) Cross-over quantity at which the two ovens have equal costs = (Fixed cost of bigger oven - Fixed cost of current oven) / (Variable cost of current oven - Variable cost of bigger oven)

= (3000-2000)/(0.25-0.20)

= 20,000 pizzas

b) If the owner expects to sell 9,000 pizzas, then he should NOT get the new oven, because this is less than the cross-over volume. Therefore, cost of bigger oven will be higher for this quantity. Total cost of current oven is lesser for this quantity.

Total cost of current oven = 2000+0.25*9000 = $ 4250

Total cost of new bigger oven = 3000 + 0.2*9000 = $ 4800

It is evident from the above calculation of total cost also, that the owner should NOT get the new oven for this quantity.