Transcribed Image Text: P4.5 (LO 1, 2, 4), AN Palo’s is the new favorite pizza, pasta, and sub place in town! Everyone raves about the gener- ous portions and the
Transcribed Image Text: P4.5 (LO 1, 2, 4), AN Palo’s is the new favorite pizza, pasta, and sub place in town! Everyone raves about the gener-
ous portions and the delicious flavors of this restaurant’s classic, go-to eats. After one year of operations, the manager,
Laticia, wants to evaluate what has gone well and what could go better. She notes that while pizza represents the
company’s biggest sales volume item, it isn’t necessarily the most profitable item. Alternatively, pasta, while not the
biggest seller, does generate a very high contribution margin. Laticia is struggling with how to balance these two
seemingly opposite products in terms of their profitability, while recognizing that subs are also becoming popular
among the usual crowd. Here are the current contribution margins for each of the following three products.
Pizza Pasta Sub
Contribution margin per unit
Laticia knows that for every two sub sandwiches sold, Palo’s sells three orders of pasta and five pizzas. She also
knows that if she wants to keep her management position, and possibly even get another raise, she’s going to have
to Palo’s manage its growing costs. The operating costs, outside of the food costs, came to $2,880 last month.
She has overheard the owner grumbling that this month and going forward, those costs are expected to increase.
(Round to 2 decimal places where necessary.)
a. Determine the break-even point in units for each of the three products.
b. Recognizing that fixed costs are expected to increase, project a 20% increase in fixed costs over last month,
and determine a new break-even point in units for each of the three products. How many additional piz-
zas, pasta orders, and subs need to be sold just to cover the additional fixed costs?
c. Suppose Palo’s raises the selling price for each product to a level that generates a 20% higher contribution
margin for each product (compared to the current amount). In light of the 20% higher fixed costs, would
that keep break-even volumes closer to what they were originally (in part (a))? Could the company
have any issues as a result of this implementation?
d. In order to regain some of the lost profitability caused by rising fixed costs, the owner is considering reduc-
ing portion size for the pastas and subs instead of raising any selling prices. Discuss (1) whether this could
improve Palo’s profitability if everything goes well, and (2) what could go wrong with this strategy. Clearly
state your opinion as to whether this might be a good plan or not.
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