ACTIVITY: Break-Even Analysis (CVP): 7 points Name: Learning Objective: Apply Cost-Volume-Profit (CVP) concepts and calculations to complete a break-even analysis. The Scenario: You (and your team) consult for small businesses. Your client, Pie in the Sky Pizzeria, has hired you to evaluate the business compared to a major competitor, Home Slice Pizza. You will perform CVP analysis to determine the break-even point in $ and units (pizzas) of product required to sell to make $10,000 in profit. ACTIVITY SUMMARY (3 parts): PART 1: (1 point) TERMS: Fill in definitions for the "Terms to Know" below. (Please use resources provided in this class; no points awarded for outsourced definitions) PART 2: (3 points) CALCULATIONS: Using the data given for the businesses, complete the Company Comparisons table (on next page). The left-hand column is Your client, Pie in the Sky Pizzeria); the right-hand column is the competition, Home Slice Pizza. Please note the following: Formulas are provided at the bottom of the Company Comparisons (page 2). Variable costs should be expressed as the Total Costs Per Unit Fixed costs are the Total Monthly Business Expenses. PART 3: (3 points) ANALYSIS: Once you have completed the calculations, Answer the 3 x Activity Questions AND the 3 x Pause and Reflect Questions. Please note: Please be specific when making recommendations about costs. For question 3, make sure to provide a written explanation as well as calculations to support your answer. (Hint: Use the profit formula using the variable X as the information you are trying to calculate, such as variable expenses or fixed costs.) PART 1: Terms to Know: Define in your OWN words (1 point): Variable expenses: Fixed expenses: .Net Income/Profit:_ Revenue: Contribution margin: Target profit:_ Break-even point: Proving the Price is Right Pie in the Sky Pizzeria BREAK-EVEN ANALYSIS (CVP) Home Slice Pizza Sales Information Sales Information Sales price per pizza $ 10.00 Sales price per pizza $ 10.00 Cost Per Pizza Cost Per Pizza Dough 1.25 Dough $ 0.75 Toppings 1.50 Toppings 1.10 Sauce 0.30 Sauce 0.25 Mozzarella 0.20 Mozzarella 0.15 TOTAL: TOTAL: Monthly Business Expenses Monthly Business Expenses Rent Manger's salary Utilities Advertising Insurance $ 1,650 Rent $ 2,200 1,200 Manger's salary 1,000 700 Utilities 950 600 Advertising 900 350 Insurance 450 TOTAL: TOTAL: PART 2: Company Comparisons Table (3 points) Business Data Sales price per unit Variable cost per unit Total fixed costs Contribution margin Break-even point Number of units to be sold to earn $10,000 Your Client The Competition Formulas: Contribution margin - Sales price per unit-Variable cost per unit Break even point Fixed Costs/Contribution margin Number of units to be sold to earn $10,000 (Fixed Costs + $10,000)/Contribution margin Profit (Sales price per unit Sales units)-(Variable costs per unit Sales units) - Fixed Costs Proving the Price is Right BREAK-EVEN ANALYSIS (CVP) Activity Questions (1.5 points; meaning 0.5 point per question) 1. Explain to Pie in the Sky management why they must sell more pizzas than Home Slice Pizza to earn a profit of $10,000, even though both Pie in the Sky and Home Slice Pizza sell pizza at the same selling price. Please show your work. 2. Provide at least two (2) possible actions to reduce the required quantity sold to earn $10,000 profit. Please be specific as it relates to CVP. Creative ideas encouraged. 3. Calculate the REDUCTION of variable cost for Pie in the Sky required to sell the same number of pizzas as Home Slice Pizza to earn the target profit $10,000. (What is the amount of change/reduction, NOT the new cost). Please show your work. Pause and Reflect (1.5 points; meaning 0.5 point per question) 4. What is the relationship between fixed costs and the break-even point? 5. What is the relationship between contribution margin and the break-even point? 6. What can a business do to improve its contribution margin