Project #74868 - Accounting Level 6

John Italia started a pizzeria in 2012. Mr. Italia increased his business between 2012 and 2014 and profits have more than doubled since 2012. Mr. Italia does not understand why his profits have increased faster than his volume, but he believes that his focus and strategic positioning regarding high levels of customer service and product quality have helped fuel this growth in his business.

Projected sales for 2015 are $416,714 with a cost of goods sold (food costs only – Mr. Italia only uses fresh ingredients) equal to $166,685.60 with the average pizza selling for $11.50.

Currently, Mr. Italia rented a building for $1,800 per month. Two salaried persons staff the restaurant full-time (annual cost per restaurant employee is $30,000) and six college students always work 30 hours per week delivering pizza (annual cost per delivery employee is $15,000). An outside accountant prepares the taxes and bookkeeping at a cost of $900 per month. The necessary restaurant equipment and delivery cars were originally purchased for cash in 2015. The annual depreciation expense for the restaurant equipment is $8,000 and for the delivery equipment is $16,000. Mr. Italia has noticed that annual expenses for utilities of $7,165 have been rather constant regardless of the sales level.

Required:

 

1. Based on the above expenses, prepare a contribution margin income

 

Required:

1. Based on the above expenses, prepare a contribution margin income statement for 2015. Please use formulas and proper formatting for the income statement in Excel. Please show the CMR, also. (If you need an Excel refresher, please review YouTube postings on the Excel Tutorials page on Webcourses).

2. What is the break-even point in the number of pizzas sold? In sales revenue?

3. What is the cash flow break-even point in the number of pizzas that must be sold? (Hint: just consider the fixed costs that are actually ‘cash’ expenses.)

4. Mr. Italia would like an after-tax net income of $65,000 at a tax rate of 30%. What volume must be reached in number of pizzas in order to obtain the desired income?

5. How much can Mr. Italia’s 2015 projected sales decline before his operating income becomes $0?

6. Mr. Italia wants to know if he should introduce a new automated pizza oven that uses frozen ingredients. This new pizza oven would allow him to reduce his unit (not total) variable costs by 25%, but his fixed costs would increase by $10,000 annually. Implementing this change will allow him to reduce his average selling per pizza to $10.00. Mr. Italia believes that the lower price will increase the volume (units not revenue) of pizzas sold by 10% without incurring any additional fixed costs beyond the $10,000 already listed previously. If this change is not made, Mr. Italia believes that the projections for 2015 are accurate.

a. Please prepare an updated ‘what if’ contribution margin income statement.

b. Would this change be a good financial move for his business?

c. Would it be a good business decision?

7. Briefly explain to Mr. Italia why his profits have increased at a faster rate than his sales – please use the metric for measuring risk in your explanation.f

Subject Business
Due By (Pacific Time) 06/25/2015 05:30 pm
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