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The local convenience store makes personal pan pizzas. Currently, their process makes complete pizzas, fully cooked, for the customer. 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 customer to finish 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.a. What is the crossover point between the existing process and the proposed process?b. If the owner expects to sell 9,000 pizzas, should he get the new oven?

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Answer:

Instructions are below.

Explanation:

Giving the following information:

Process A:

Fixed cost= $20,000

Unitary variable cost= $1.75

Process B:

Fixed cost= $24,000

Unitary variable cost= $1.25

A) First, we need to structure the total costs formula:

Process A= 20,000 + 1.75x

Process B= 24,000 + 1.25x

x= number of units

Now, we will equal them to determine the crossover point:

20,000 + 1.75x = 24,000 + 1.25x

0.5x= 4,000

units= 8,000

B) units= 9,000

Process A= 20,000 + 1.75*9,000= $35,750

Process B= 24,000 + 1.25*9,000= $35,250

The company should acquire a new process.

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a. The crossover point between the existing process and the proposed process is 8,000 units.

b. Yes, the owner should get the new oven.

Existing process  

Fixed cost (FC) = $20000

Variable cost (VC) = $1.75

Proposed process

Fixed cost (FC) = $24000

Variable cost (VC) = $1.25

a. Crossover point

Let x represent the crossover point between the two process

Existing process= 20,000 + 1.75x

Proposed process = 24,000 + 1.25x

Hence:

20,000 + 1.75x = 24,000 + 1.25x

1.75x-1.25x=24,000-20,000

0.5x= 4,000

Divide both side by 0.5x

x=4,000/0.5

x=8,000 units

b. Sales of 9,000 pizzas,

Existing process=$20,000 + ($1.75×9,000)

Existing process=$20,000 +$15,750

Existing process= $35,750

Proposed process =$24,000 + ($1.25×9,000)

Proposed process=$24,000+$11,250

Proposed process =$35,250

Based on the above calculation the company should choose the proposed process because it has a lesser cost.

Inconclusion the crossover point between the existing process and the proposed process is 8,000 units. The owner should get the new oven.

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