1.Link wants to make $100,000 after tax on his new venture into selling pizza-on-a-stick, using a "push along" cart at the beach. For each pizza-on-a-stick, he incurs raw material costs of $5 and sells them for $10. He pays a salary to his friend Zelda, who operates the cart for $50,000. If he buys the cart himself, he will incur fixed expenses of $20,000. Or, he can rent the cart and pay $1 to the cart supplier each time he sells a pizza stick. What is his point of indifference? That is, at what volume of pizza sticks is he indifferent about renting or buying the cart? (Insert a number ONLY)2.Like Link, Chrom sells pizza-on-a-stick at the beach. But Chrom also sells dogs-in-a-pocket, which are hot dogs you can carry with you that have enough preservatives to survive in your pocket for years. For each pizza-on-a-stick, Chrom incurs raw material costs of $5 and sells them for $10. He incurs material costs of $3 for the dogs and sells them for $5. He sells 3 times as many dogs as he does pizzas and incurs fixed expenses of $50,000. To achieve an operating income of $60,000 how many dogs must Chrom sell? (Insert a number ONLY, for example, if the answer is five thousand, enter "5000")

ANSWER 1. Point of indifference is the level of volume at which total costs of two alternatives are the same. A company may have two methord available and it may so happen that at lower levels of activity one method is suitable and beyond that other method is viable. Now at a point where both cost is identical for both alternative will be the indifference point. Cost Indifference Point = Differential Fixed Cost / Differential variable cost per unit Buy option - Fixed cost - 20000 Variable cost - $5 Rent option - Fixed cost - 0 Variable cost - $6 Differencial - Fixed cost - 20000 Variable cost - $1 Indifference point = 20000 / 1 = 20000 units. 2. In order to achieve operating income of 60000. Total contribution required will be Income 60000 + Fixed cost 50000 = $110000 Profit on sale of pizza on the stick = 10-5 = 5 per unit Profit on sale of dogs in the pocket - 5-3 = 2 per unit Therefore total qunatity required to ge desired contribution will be Pizza - 10000 units * 5 = $50000 Dogs - 30000 units * 2 = $60000 So Chrom must sell 30000 units of dogs in the pocket to achieve a operating income of $60000.

Answered: .Link wants to make $100,000 after tax…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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1.Link wants to make $100,000 after tax on his new venture into selling pizza-on-a-stick, using a "push along" cart at the beach. For each pizza-on-a-stick, he incurs raw material costs of $5 and sells them for $10. He pays a salary to his friend Zelda, who operates the cart for $50,000. If he buys the cart himself, he will incur fixed expenses of $20,000. Or, he can rent the cart and pay $1 to the cart supplier each time he sells a pizza stick. What is his point of indifference? That is, at what volume of pizza sticks is he indifferent about renting or buying the cart? (Insert a number ONLY)

Like Link, Chrom sells pizza-on-a-stick at the beach. But Chrom also sells dogs-in-a-pocket, which are hot dogs you can carry with you that have enough preservatives to survive in your pocket for years. For each pizza-on-a-stick, Chrom incurs raw material costs of $5 and sells them for $10. He incurs material costs of $3 for the dogs and sells them for $5. He sells 3 times as many dogs as he does pizzas and incurs fixed expenses of $50,000. To achieve an operating income of $60,000 how many dogs must Chrom sell? (Insert a number ONLY, for example, if the answer is five thousand, enter "5000")

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