CMA Study Group

why is the 1$ of labour to bake the pizza considered irrelevant in this calculation.?

One of the items served at a restaurant is pizza that is prepared and baked in the restaurant's kitchen. Each pizza requires $3 of ingredients, $2 of labor to prepare the ingredients, $1 of labor to bake the pizza, and $4 of allocated occupancy costs. The restaurant's supplier has offered to sell the restaurant pre-made pizzas, ready for baking, for $8 each. If the restaurant accepts the supplier's offer, the existing pizza preparation space will be converted into two additional dining tables that will increase profits by $42,000 per year by selling drinks, side dishes, and desserts. The restaurant expects to sell 15,000 pizzas annually with or without the additional dining tables. Should the restaurant accept the supplier's offer?

A. Yes, because the restaurant's profits will increase by $57,000. B. No, because the restaurant's profits will decrease by $3,000. Answer (B) is correct. By purchasing the $8 ready-to-bake pizza, the restaurant will forgo the $3 ingredient expense and the $2 of labor to prepare the ingredients. Since it will still incur the $1 cost of labor for baking and $4 of occupancy costs, these will be ignored for the calculation. The restaurant will make an additional $42,000, but the cost of pizza increases by $3 ($8 – $3 – $2). If it sells 15,000 pizzas, this will be an additional expense of $45,000 (15,000 × $3). Therefore, the restaurant would decrease profits by $3,000 ($42,000 – $45,000), and this offer should therefore be declined. C. Yes, because the restaurant's profits will increase by $12,000.

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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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Its a tricky question and a play of words.

The question states that "The restaurant's supplier has offered to sell the restaurant pre-made pizzas, ready for baking, for $8 each"

so this means the process of baking will be performed in the restaurant itself and thats why even after accepting the proposal they will still have to incur the expense of baking pizzas for $1 of labour.

I hope it helped.

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Ashvin Kulkarni
Accountant
Pune
India
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Original Message:
Sent: 10-12-2020 04:45 AM
From: Tayba Al-Mehdar
Subject: Decision Making -- Make or Buy

why is the 1$ of labour to bake the pizza considered irrelevant in this calculation.?

One of the items served at a restaurant is pizza that is prepared and baked in the restaurant's kitchen. Each pizza requires $3 of ingredients, $2 of labor to prepare the ingredients, $1 of labor to bake the pizza, and $4 of allocated occupancy costs. The restaurant's supplier has offered to sell the restaurant pre-made pizzas, ready for baking, for $8 each. If the restaurant accepts the supplier's offer, the existing pizza preparation space will be converted into two additional dining tables that will increase profits by $42,000 per year by selling drinks, side dishes, and desserts. The restaurant expects to sell 15,000 pizzas annually with or without the additional dining tables. Should the restaurant accept the supplier's offer?

A. Yes, because the restaurant's profits will increase by $57,000. B. No, because the restaurant's profits will decrease by $3,000. Answer (B) is correct. By purchasing the $8 ready-to-bake pizza, the restaurant will forgo the $3 ingredient expense and the $2 of labor to prepare the ingredients. Since it will still incur the $1 cost of labor for baking and $4 of occupancy costs, these will be ignored for the calculation. The restaurant will make an additional $42,000, but the cost of pizza increases by $3 ($8 – $3 – $2). If it sells 15,000 pizzas, this will be an additional expense of $45,000 (15,000 × $3). Therefore, the restaurant would decrease profits by $3,000 ($42,000 – $45,000), and this offer should therefore be declined. C. Yes, because the restaurant's profits will increase by $12,000.

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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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