The Local Convenience Store Makes Personal Sized Pizzas

question 211

Essay

The local convenience store makes personal sized pizzas. Currently, its process makes complete pizzas, fully cooked, for the customer. This process has a fixed cost of $18,000, and a variable cost of $1.85 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 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 $1.05 per pizza.
(a) What is the crossover point between the existing process and the proposed process?
(b) If the owner expects to sell 7,000 pizzas, should he get the new oven?

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Definitions:

Demand Shift

A change in the quantity of a product or service that consumers are willing and able to buy at all price levels, caused by factors other than the price of the product itself.

Operating Costs

are expenses associated with the day-to-day functioning of a business, such as rent, utilities, and payroll.

Price of Eggs

The monetary cost required to purchase eggs, which can vary based on factors such as location, type of eggs, and market conditions.

Price Gouging

A situation where sellers increase the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair, often during a crisis.