Barney’s Pizza Parlor recently opened for business. The owner wants a cost function estimate to help with future planning. The manager feels that last month’s results fairly represent costs over the coming six months. Last month 600 pizzas were sold.

From the following information, use account analysis to estimate the firm’s cost function for pizzas sold.

Wages for part-time help …………….................     $2,340

Pizza toppings …………………………....................           180

Pizza dough ……………………….....……...............            240

Store rent ………………………...................………..           400

Depreciation on furniture and ovens ….......             80

Napkins, paper plates, cups, and straws …..            75

Liability insurance ……………………...................          100

Advertising ……………………………......................            60

Cleaning supplies ……………………….................           15

Managers’ salary ……………………….................       1,400

Utilities (electricity and telephone) …........…          110

Soft drink purchases ………………................…           375

REQUIRED

A. Develop a cost function using the data from the accounting records.

B. Use the cost function to estimate the total costs if 700 pizzas are expected to be sold next month.

C. What assumptions do you make when you estimate this cost function? List two factors that could cause the assumption for variable costs to be incorrect next month.