A Large Hotel-Casino in Las Vegas Is Currently Under Construction

question 36

Essay

A large hotel-casino in Las Vegas is currently under construction. There will be an Italian restaurant in the hotel that will serve pizza. Management is trying to decide whether to make the pizza themselves or buy it frozen and simply heat it to customer order. There are two major sources of commercial-grade frozen pizza: Ma Ma's Products and the Chun-Yee Corporation. If they make the pizza themselves a substantial amount of preparation equipment will be required, along with skilled personnel. Frozen pizza needs either a conventional oven (Ma Ma's) or a microwave (Chun-Yee). Financial data is as shown below (variable costs are estimated based on an average pizza purchase):
a.At what volume is either Ma Ma's or Chun-Yee acceptable?
b.At what volume is the company indifferent to either Chun-Yee or make in-house?

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Definitions:

Expected Return

The weighted average of all possible returns for an investment, accounting for the probability of each outcome.

Dividend Yield

The dividend yield represents a financial metric illustrating the annual dividend payments of a company as a proportion of its current stock price.

Preemptive Right

A shareholder's right to buy additional shares in a company before the company offers them to the general public, to maintain their percentage of ownership.

Ownership Interests

Legal rights and claims a person or entity has in a company, typically represented in the form of stocks or shares.