Pats Pizzeria produces three types of deli style pizzas: Thin Crust, Deep Dish, and Stuffed Crust. Pats

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Question:

Pat’s Pizzeria produces three types of deli style pizzas: Thin Crust, Deep Dish, and Stuffed Crust. Pat’s anticipated sales mix is 4:5:6 Thin:Deep:Stuffed. Current sales are 1,500 bundles per year. Thin Crust Deep Dish Stuffed Crust Unit Selling Price $15 $18 $20 Unit Variable Cost $8 $10 $11 Fixed costs are estimated at $50,000, which include $44,000 for general overhead, such as rent, utilities, etc., and $6,000 for advertising. Pat’s tax rate is 20%. Round all interim answers to 4 decimal places. For all questions, supporting calculations MUST be included. What is the operating leverage ratio when 1,500 bundles are sold? If sales increase by 15% from this level, by what percentage should Pat expect profit before tax to increase? How much is this increase in dollars? What is Pat’s expected profit before tax in dollars?

B. What is Pat’s margin of safety, in units of each type of pizza, at current level of sales?

C. Prepare a contribution margin income statement for the level of sales required to earn $100,000 of before tax profits. Show revenues and variable costs for each type of pizza in the contribution margin income statement.

D. If Pat increases advertising costs by 200%, sales of all types of pizzas are expected to increase by 12% above the original sales levels. Assuming the sales mix will remain the same, should Pat increase her advertising expenditure? Why or why not?

E. What is the minimum percentage sales would need to increase before Pat would consider the additional advertising? (Hint- at what point will she not lose anything?) (Return to the original problem assumptions for parts F – G. Do not assume advertising has been increased.)

F. How many bundles of pizza will Pat have to sell to earn after-tax profits equal to 15% of revenue?

G. In analyzing results at the end of the year, Pat discovered that, although she sold 22,500 pizzas as planned, the actual sales mix was 6 Thin Crust, 6 Deep Dish, and 3 Stuffed Crust pizzas. How did Pat’s actual profit differ from her projected profit? Explain why this happened.