The company annual fixed costs are birr 40,000.
The sale price of a piizza is birr10.& it costs the copany birr 5 to make and deliver each pizza.
1,What is the company's break even point in units?
2,compute the contribution margin ration.
3,how many pizzas must the company sell to earn a target profit of birr 65,000?
proft=revenue-costs
profit=10u -5u-10,000
breakeven, profit is zero, so the number of units u
5u=10,000
u=2000
margin ratio: (10-5)/5=1.0 or 100 percent
65,000=10u-5u-10,000
55,000=5u
u=11,000
on a perday basis , 11,000/365=30.1 pizzas/day
To answer these questions, we need to understand some basic concepts related to break-even analysis and contribution margin ratio.
1. Break-even point in units:
The break-even point is the point at which total revenue equals total costs, resulting in no profit or loss. To calculate the break-even point in units, we divide the total fixed costs by the contribution margin per unit.
Formula:
Break-even point in units = Fixed costs / Contribution margin per unit
Given:
Fixed costs = 40,000 birr
Sale price per pizza = 10 birr
Cost per pizza = 5 birr
Contribution margin per unit = Sale price - Cost per unit
Calculation:
Contribution margin per unit = 10 birr - 5 birr = 5 birr
Break-even point in units = 40,000 birr / 5 birr = 8,000 units
Therefore, the company's break-even point is 8,000 units.
2. Contribution margin ratio:
The contribution margin ratio is the difference between total sales revenue and total variable costs, expressed as a percentage of total sales revenue. It indicates the profitability of each unit sold.
Formula:
Contribution margin ratio = (Contribution margin / Sales) * 100
Given:
Sale price per pizza = 10 birr
Cost per pizza = 5 birr
Calculation:
Contribution margin per unit = Sale price - Cost per unit = 10 birr - 5 birr = 5 birr
Contribution margin ratio = (5 birr / 10 birr) * 100 = 50%
Therefore, the company's contribution margin ratio is 50%.
3. Target profit:
To calculate the number of pizzas the company must sell to earn a target profit of 65,000 birr, we use the following formula:
Formula:
(Qty of pizzas * Contribution margin per unit) - Fixed costs = Target profit
Given:
Fixed costs = 40,000 birr
Target profit = 65,000 birr
Sale price per pizza = 10 birr
Cost per pizza = 5 birr
Substituting the values:
(Qty of pizzas * 5 birr) - 40,000 birr = 65,000 birr
Simplifying the equation, we get:
Qty of pizzas * 5 birr = 65,000 birr + 40,000 birr
Qty of pizzas * 5 birr = 105,000 birr
Qty of pizzas = 105,000 birr / 5 birr
Therefore, the company must sell 21,000 pizzas to earn a target profit of 65,000 birr.