What Costs Are Relevant When Determining How Many Pizzas A M

What Costs Are Relevant When Determining How Many Pizzas a Month Zume

What costs are relevant when determining how many pizzas a month Zume Pizza must sell to break even? Video: (Opens in a new window) Plain text: Zume Pizza uses a combination of robots, artificial intelligence (AI), and GPS in its food trucks to deliver pizzas to customers’ houses just as the pizza is finished baking. Pizzas are actually prepared and baked in the Zume pizza truck by an employee assisted by robots. Zume Pizza started operations in April 2016 and is currently selling about 250 pizzas per day. The pizza delivery process starts with a customer using Zume Pizza’s app to order pizza.

The pizza combinations offered by Zume have been derived by analyzing customer data to offer several popular options. These preset combination recipes are programmed into Zume’s computers, so that its robots can build and bake the pizzas efficiently. All pizza preparation and baking happens in the Zume pizza truck. Once the customer orders a pizza, a worker in the Zume food truck will toss the dough, cut the vegetables, and put on toppings. A robot will put on the pizza sauce.

Each Zume pizza truck has 56 pizza ovens, which are each individually connected to the order system and the truck’s GPS. A robot will put the pizza into the designated oven exactly four minutes before the truck reaches the customer’s house. A worker will pull out the pizza when it is finished and place it into the cutter, where a robot will cut the pizza. The pizza is boxed and the pizza is delivered to the customer’s door, all within a few minutes of finishing baking. Eventually, Zume’s owners hope to use a robot to remove pizzas from the oven as well.

Assume that average selling price per pizza is about $18. To follow are estimates of costs that might be incurred by Zume Pizza in its pizza business. Description of cost Cost estimate Ingredient cost per pizza $6.00 Truck fuel cost per delivery $3.00 Cost of pizza delivery truck (estimated useful life 5 years, no salvage value) $80,000 Cost of initial software development (estimated useful life 3 years) $30,000 Annual maintenance/update costs of software $25,000 Supplies cost per pizza (box, napkins, etc.) $1.00 Cost to park pizza delivery truck per year (garage facility) $24,000 Insurance and other regulatory costs per year $36,000 Cost of cofounders' salaries per year $150,000 Cost to rent restaurant kitchen facility for testing and food prep (per year) $45,000 Direct labor cost per pizza (driving truck and preparing pizza in truck) $5.00

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When analyzing the costs associated with Zume Pizza’s operations to determine the break-even point, it is crucial to distinguish between variable and fixed costs. Understanding which expenses fluctuate with the volume of pizzas sold and which remain constant regardless of sales volume helps in accurately calculating the number of pizzas Zume must sell to cover its costs.

Variable Costs: These are costs that vary directly with the number of pizzas produced and sold. From the list provided, the ingredient cost per pizza ($6.00) and the supplies cost per pizza (including boxes and napkins, $1.00) are primary examples of variable costs. Additionally, the direct labor cost per pizza ($5.00), which includes the costs of driving the truck and preparing the pizza, is variable since it depends on the number of pizzas produced. The truck fuel cost per delivery ($3.00) would also be considered a variable cost per pizza, assuming fuel consumption correlates with the number of deliveries.

Other variable costs that Zume might incur include additional ingredients if offering special toppings, or commissions related to sales (if applicable). These costs would change in proportion to the volume of pizzas sold, making them relevant when calculating the break-even point.

Fixed Costs: These are costs that remain constant regardless of the number of pizzas sold. From the list, the cost of the pizza delivery truck ($80,000, depreciated over 5 years), the annual software development amortized over three years, the annual maintenance/update costs ($25,000), and the annual costs related to parking the truck and insurance ($24,000 + $36,000) are fixed costs. The cofounders' salaries ($150,000) and rental costs for the testing and food prep facility ($45,000) are also fixed, as they do not fluctuate with sales volume in the short term.

Other fixed costs that could be considered include administrative expenses, corporate salaries, and marketing costs if not directly tied to volume. Additionally, costs related to compliance or regulatory fees that are steady year-round would fall into this category.

To accurately determine the break-even point, Zume should include all variable costs incurred per pizza and total fixed costs. This allows calculation of how many pizzas need to be sold to cover all fixed expenses and variable costs, ensuring the business is covering its costs and not operating at a loss.

In particular, the most critical costs for the break-even calculation are the ingredient cost, the direct labor per pizza, the supplies per pizza, and the variable portion of the truck’s operational costs, as these directly relate to each unit sold. Fixed costs like the truck and software development are allocated over the total expected sales volume to analyze when the revenue from pizza sales will offset these unrecoverable investments.

In conclusion, a comprehensive understanding of both fixed and variable costs is essential for Zume Pizza to determine its daily or monthly sales targets. Proper classification helps in managing operational efficiency, setting pricing strategies, and guiding expansion plans. Accurate cost analysis also assists in identifying potential areas for cost reduction and optimization, ultimately contributing to the long-term profitability of the business.

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