CRITICAL THINKING EXERCISE 12-3
A student organization has been given permission to operate a pizza stand during the upcoming homecoming weekend. The stand will be located just outside the football stadium, making it accessible during the ball game. The location is also convenient for visitors as they tour the campus at other times during the weekend. An estimated 2,500 visitors will be on campus, in addition to the campus population of 1,500.
Each pizza requires:
1/2 pound of pizza flour
2 ounces of pizza sauce
1/8 pound of pepperoni
1/2 pound of cheese.
Pizza flour costs $8.00 per 10-pound bag; pizza sauce, $4.80 per 64-ounce jar; pepperoni, $18.00 per 5-pound package; and cheese, $15.00 per 5-pound package. Club members will cook the pizzas and staff the stand on a volunteer basis. The university requires each vendor to pay a $25 permit fee and a $50 refundable deposit on the building. Your club plans to donate the profits from the pizza sales to a local children’s hospital.
1.
How many pizzas can you anticipate selling?
2.
What price should you charge per pizza?
3.
How much of each raw material do you need to buy?
4.
What will be your probable profit?
5.
Develop a financial plan for your weekend enterprise.
12.
1

NOTES ON CRITICAL THINKING EXERCISE 12-3
I have used this exercise several times in my classes. Below are two of the potential solutions, one conservative and one very optimistic.
ALTERNATIVE 1
1. How many pizzas can you anticipate selling?
On the homecoming weekend, there will be about 4,000 people on campus. The first step in developing a budget is to estimate what percentage of attendees will purchase your pizzas. This can be complicated. Factors such as the weather, time of day, and presence of other food vendors would have to be considered. Obviously, you would have to consider the demand for pizzas at several price points. Perhaps the simplest method is to use a percentage, say 10%. Potential sales: 400 pizzas.
2. What price should you charge per pizza?
You could consider several pricing strategies. Chapter 9 covered several possibilities: demandbased pricing, competition-based pricing, cost-based pricing, and break even analysis. What is the price are people willing to pay? What price is our competition charging? What is the break even point? To simplify transactions on the day of the sale, you may want to set the price at a whole dollar amount and not have to bother with coin change.
The analysis below uses cost-based pricing. The fixed costs are quite low—the only one given is the $25 permit. Next, calculate the cost of raw materials per pizza, the variable cost.
Ingredient
Amount per pizza Ounces
Cost of ingredient
Cost per ounce
Cost per pizza
Pizza flour ½ pound 8 oz. $8 per 10 lb $0.05 $0.40
Pizza sauce
Pepperoni
2 ounces
1/8 pound
½ pound
2 oz.
2 oz.
$4.80 per 64 oz
$18 per 5 lb.
$0.075
$0.225
$0.15
$0.45
Cheese 8 oz. $15 per 5 lb $0.1875 $1.50
Ingredient Ounces
$2.50
After determining the cost of raw materials, a price can be set that covers these costs and provides the desired profit. Possible prices: $5.00, $7.00, or $9.00. Setting the price
3. How much of each raw material do you need to buy?
Amount per pizza
Potential sales units
Total ounces needed
Total pounds
Pizza flour ½ pound 8 oz. 400 3200 200
Pizza sauce
Pepperoni
Cheese
2 ounces
1/8 pound
½ pound
2 oz.
2 oz.
8 oz.
400
400
400
800
800
3200
50
200
12.2
I NTRODUCTION TO B USINESS : Instructor’s Resource Manual

You will need:
Pizza flour
Pizza sauce
Pepperoni
Cheese
Total cost
20 10-pound bags
12½ 64-ounce jars
20 x $8.00
13 x $4.80
10 5-pound packages 10 x $18.00
40 5-pound packages 40 x $15.00
4. What will be your probable profit?
Your profit will depend on the price you charge. Using $7.00:
Price $7.00
Revenue
Variable costs
$2,800.00 (400 x $7.00)
$1,002.40
Fixed costs
Total costs
Profit
$25.00
$1,027.40
$1,772.60
5. Develop a financial plan for your weekend enterprise.
$160.00
$62.40
$180.00
$600.00
$1,002.40
Project Costs:
Buy permit:
Purchase raw materials:
Pizza flour
Pizza sauce
Pepperoni
20 10-pound bags
12½ 64-ounce jars
20 x $8.00
13 x $4.80
10 5-pound packages 10 x $18.00
$25.00
$160.00
$62.40
$180.00
Cheese
Total cost
40 5-pound packages 40 x $15.00 $600.00
$1,002.40
(The $50 deposit is a wash, $50 cost, $50 refund. Therefore, it was not used in these calculations.)
Project Revenue
Assuming sales of 400 pizzas (10% of attendees) and using $7.00 sale price:
400 x $7.00 = $2,800.00
Project Net Profit:
Revenue:
Cost of Goods:
$2,800.00
$1,002.40
Fixed Costs: $25.00
Net Profit $1,772.60
CHAPTER 12: Understanding Financial Information and Accounting 12.3

ALTERNATIVE 2
1.
How many pizzas can you anticipate selling?
Assume that you will sell pizzas to 75% of the people at homecoming (3,000 pizzas.) People will be hungry, and they will want to support the club.
2.
What price should you charge per pizza?
Charge $10.00 per pizza.
3.
How much of each raw material do you need to buy?
Ingredient
Pizza flour
Pizza sauce
Amount per pizza
½ pound
2 ounces
Ounces
8 oz.
2 oz.
Potential sales units
3000
3000
Total ounces needed
24,000
6,000
Total pounds
1500
Pepperoni
Cheese
1/8 pound
½ pound
2 oz.
8 oz.
3000
3000
Supplies needed:
Pizza flour
Pizza sauce
Pepperoni
150 10-pound bags
93.75 64-ounce jars
150 x $8.00
94 x $4.80
75 5-pound packages 75 x $18.00
Cheese
Total cost
300 5-pound packages 300 x $15.00
4.
What will be your probable profit?
6,000
24,000
$1,200.00
$ 451.20
$1,350.00
$4,500.00
$7,501.20
Price is $10.00
Revenue
Variable costs
Fixed costs
$30,000.00 (3,000 x $10.00)
$7,501.20
$25.00
Total costs
Profit
$7526.20
$22,473.80
5.
Develop a financial plan for your weekend enterprise.
375
1500
Purchase enough raw materials to make 3,000 pizzas and market aggressively. If sales don’t meet expectations by the end of the third quarter, lower the price by half. Even at a $5.00 sales price, you will cover the $2.50 variable cost and make $2.50 profit per pizza.
12.4
I NTRODUCTION TO B USINESS : Instructor’s Resource Manual