Franko’s Pizzeria has been in business for ten years. They produce frozen pizzas that they sell wholesale to grocery stores. They sell only two types of pizza: regular crust and stuffed crust (cheese in the crust). Both types of pizza have the same identical toppings (pepperoni, olives, cheese, marinara sauce, and truffles), so the only difference between the two types of pizza is due to the crust. Franko’s sells regular crust pizzas for $5 each and stuffed crust for $5.50 each to cover the additional cheese in the crust and the direct labor to put the cheese in the crust.
During the last year, Franko’s pushed the stuffed crust pizza through advertising and had record-setting stuffed crust pizza sales. However, Franko’s net income was lower than it had been in past years. The CEO of Franko’s, Wynona, is thinking that they may not be charging enough for the stuffed crust pizza. However, based on their previous costing methods, they have a 150% margin on both types of pizza (product cost of $2 per pizza for the regular crust and $2.20 per pizza for stuffed crust). Wynona has recently heard about activity-based costing and has hired you to help her get a better feel of his costs using activity-based costing.
Wynona has determined that they have three items of overhead: utilities, manager salary, and maintenance. She has given you the following information regarding these overhead costs for 2022.
Exhibit 1 – Overhead Costs
Utility Manager. Salary Maintenance
2012 Cost. $15,050. $35,000 $45,200
Driver. Square Feet of Space. Units Produced Maintenance Calls
Total # of Driver 3,000 255,000 87
Wynona also gives you the following information regarding the costs associated with each type of pizza. Also she gives you information regarding the use of each cost driver. She notes that a large portion of the maintenance calls come when the extra cheese from the stuffed crust pizzas leaks out of the crust and into the pizza ovens.
Exhibit 2 – Costs of Pizzas
Regular Crust Stuffed Crust
Direct Materials $1.35 1.40
Direct Labor $0.30. $0.40
Square Feet 1,200. 1,800
Units Produced 135,000 120,000
Maintenance Calls 15 72
Wynona wants you to address the following four questions:
1. What would be the product costs of each type of pizza be using the proposed ABC method?
2. Using the same 150% profit margin, what price should Franko’s charge for each of their pizzas?
3. Why are there such differences between her old method and the new ABC method?
4. What price do you suggest Franko’s sell each of their pizzas? Why?

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