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Part Five During the third year of operations, Big Al's estimates that 415,000 pizzas (385,000 meat and 30,000 veggie) will be produced.

I have attached my question.Part FiveDuring the third year of operations, Big Al’s estimates that 415,000 pizzas (385,000 meat and 30,000 veggie) will be produced. Direct material costs per unit are $.74 per meat pizza and $.62 per veggie pizza. Direct labor costs are $2.51 per meat pizza and $2.78 per veggie pizza. Monthly fi xed selling and administrative costs are $15,300 while monthly fi xed manufacturing overhead is $2,851. The variable overhead cost is $.55 per pizza. The sales price for veggie pizzas is $5.25 per pizza and the sales price for meat pizzas is $5.00. QuestionA. Compute the break-even point in year 3 for Big Al’s pizzas. How many veggie and meat pizzas must be sold in order to break even?B. What options does Big Al’s have to reduce the break-even point? Discuss both the quantitative and the qualitative factors that must be considered with each option. C. How many meat and veggie pizzas, respectively, would Big Al’s need to sell in year 3 to earn a before-tax profi t of $150,000? D. If its tax rate is 30 percent, how many pizzas does Big Al’s need to sell in year 3 to earn an after-tax profi t of $150,000?E. How will the break-even point change if the sales mix changes to 80 percent meat pizzas and 20 percent veggie pizzas?F. What would happen to the break-even point if labor costs increased by 10 percent ?G. What would happen to the break-even point if Big Al’s increases the sales price of veggie pizzas to $5.50 and meat pizzas to $5.25?11:28:42 AM 1:28:42 AMCopyright 2008 Thomson Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.Licensed to:Big Al’s Pizza, Inc.568Part SixIn March of year 3, Big Al’s receives a special order from an athletic arena to purchase 5,000 meat pizzas and 3,000 veggie pizzas for a special charity event.QuestionA. Assuming that Big Al’s has suffi cient excess capacity, what is the minimum price that Big Al’s would be willing to accept for this special order? Assuming that Big Al’s does not have suffi cient excess capacity, what minimum price would be acceptable? What qualitative factors should Big Al’s consider before agreeing to accept the special order? B. Big Al’s is nearing its manufacturing capacity and needs to consider ways to increase throughput. What options does Big Al’s have to increase capacity? What bottlenecks does it face? What recommendations would you make?Part SevenBig Al’s currently leases its equipment from Pizza Products for $2,500 per month. Two years of the fi ve-year lease term remain. Big Al’s can terminate the lease at any time by paying a penalty of $10,000. Big Al’s is considering purchasing equipment to replace the leased equipment. Big Al’s must purchase 10 units of each piece of equipment. Big Al’s can purchase equipment at the following prices: Equipment Price (per unit) Dough ball press $5,450 Assembly table 2,100 Cardboard cutter 4,100 Plastic sealer 2,695 Label installer 1,000QuestionA. Using NPV analysis, compare the present value of the lease payments with the cost of buying the equipment. Assuming a discount rate of 10 percent (before tax), which option is preferable?B. Big Al’s has the option of purchasing equipment from another supplier at a cost of $190,000. The supplier promises that the new equipment will reduce operating costs by $1,000 per month over the life of the equipment. Assuming a 10 percent discount rate (before tax), which option is preferable?C. Calculate the after-tax NPV for each option discussed previously. If purchased, all equipment will be depreciated over fi ve years, using straight-line depreciation, and will have no salvage value. Big Al’s tax rate is 30 percent. Is your decision still the same?D. What factors other than cost savings should Big Al’s consider in these decision problems? Part EightBig Al’s Pizza, Inc. needs a cash budget for year 3 and has provided you with the following information. Sales are all on account and are estimated to be collected over a three-month period, with 70 percent collected in the month of sale, 25 percent collected in the next month and 4 percent collected in the third month. The remaining 11:28:42 AM 1:28:42 AMCopyright 2008 Thomson Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.Licensed to:Big Al’s Pizza, Inc.5691 percent is estimated to be uncollectible. December and November sales from the previous year were $201,638 and $185,000 respectively. Because of the lag in collecting cash from sales on account, Big Al’s delays payment on some of its purchases of materials. Big Al’s estimates that 60 percent of each month’s material purchases are paid in the month of purchase and 40 percent in the following month. The accounts payable balance for materials at the end of the previous year was $20,000. Big Al’s also requires a minimum balance of $40,000 in cash at the end of each month. The company will use its line of credit when needed to bring the balance up to that minimum level. For any money borrowed, the interest rate is 6 percent compounded annually. For simplicity, you can assume that cash is borrowed on the fi rst day of the month and that loan repayments are made at the end of the month. Big Al’s plans to exercise the option on the leased production equipment in March (as described in Part Seven). The purchase price on the equipment will be $153,450, with payments of $3,260.36 per month. Big Al’s also plans on expanding the existing production space in May at a cost of $200,000. Big Al’s would like to fi nance the expansion out of current earnings and so will use the line of credit, if necessary, in May. The expansion will cause fi xed manufacturing overhead to increase by $10,000 per month, starting in May. QuestionA. Prepare a cash receipts budget for year 3, assuming estimated sales of 385,000 meat pizzas and 30,000 veggie pizzas and the following monthly distribution of sales. 8.3% July 8.5%February 9.2 August 9.8March 10.3 September 7.5April 7.6 October 9.1May 8.0 November 7.2June 6.9 December 7.6 Direct material costs per unit are $.74 per meat pizza and $.62 per veggie pizza. Direct labor costs are $2.51 per meat pizza and $2.78 per veggie pizza. Monthly fi xed selling and administrative costs are $15,300, while monthly fi xed manufacturing overhead is $2,851. The variable overhead cost is $.55 per pizza. The sales price for veggie pizzas is $5.25 per pizza and the sales price for meat pizzas is $5.00.B. Prepare a cash disbursements budget for the year. C. Prepare a summary cash budget for the year, showing any borrowing and repayment of debt with interest. Discuss Big Al’s ability to repay the expansion loan. Include a discussion of the feasibility of the project. Include qualitative factors to be considered. D. What if the sales forecast was increased by 50 percent? What impact does that have on the budget, and what is the potential impact on the company?Part NineIn December (month 24) of year 2 of operations, Big Al’s produced and sold 32,675 pizzas, consisting of 30,570 meat pizzas and 2,105 veggie pizzas. The budgeted sales price for meat pizzas was $5.00, and for veggie pizzas, $5.25. The estimated 11:28:42 AM 1:28:42 AMCopyright 2008 Thomson Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.Licensed to:Big Al’s Pizza, Inc.570production and sales during December was 31,678 meat pizzas and 2,595 veggie pizzas. Required:A. Compute the price and volume variances for sales, assuming that Big Al’s sold all pizzas produced for $137,565 (meat) and $9,051 (veggie). What might explain these variances?B. Compute the price and quantity variances for direct materials for each type of pizza, assuming that Big Al’s paid $29,093 for 32,325 units of raw material for meat pizzas and $1,453 for 2,401 units of raw material for veggie pizzas. (A unit consists of dough shell, sauce, cheese, meat or veggies, and assembly materials.) In addition, 30,995 units were used to produce meat pizzas, and 2,149 units were used to produce veggie pizzas. How would these variances be interpreted? What might explain these variances? Would you consider them to be large enough to be important? C. Compute the labor rate and effi ciency variances, assuming that Big Al’s paid $71,350 in labor costs for 7,150 hours of labor for meat pizzas and $6,425 in labor costs for 650 hours of labor for veggie pizzas. How would these variances be interpreted? What might explain them? Would you consider them to be large enough to be important?D. Using the predetermined overhead rate from Part Three (with direct labor hours as the cost driver), compute the variable overhead rate and effi ciency variances. Assume that Big Al’s paid $20,852 in total overhead costs, consisting of $17,002 of variable overhead and $3,850 of fi xed overhead. How would these variances be interpreted? What might explain these variances? Would you consider them to be large enough to be important?E. How might Big Al’s extend its variance analysis to be compatible with its use of activity-based costing as discussed in Part Three?

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