Question 35:

A local convenience store makes personal pan pizzas. Currently, its process makes complete pizzas, fully cooked, for the customers. This process has a fixed cost of $20,000 and a variable cost of $1.75 per pizza. The owner is considering a different process that can make pizzas in two ways: completely cooked (as before), or partially cooked and then flash frozen for the customers to finish heating at home. This alternate process has a fixed cost of $24,000 but a lower variable cost (because much less energy is used in baking) of $1.25 per pizza.

1. What is the crossover point between the existing process and the proposed process?
2. What range of pizza production is each process design optimal?
3. If the owner expects to sell 9,000 pizzas, should he adopt the new process design? Why?

[2+6+2=10 marks]