The owner of Miller Restaurant is disappointed because the restaurant has been averaging 7,500 pizza sales per month but the res
taurant and wait staff can make and serve 10,000 pizzas per month. The variable cost (for example, ingredients) of each pizza is $1.55. Monthly fixed costs (for example, depreciation, property taxes, business license, manager's salary) are $12,000 per month. The owner wants cost information about different volumes so that some operating decisions can be made.REQUIREMENTS:1) Fill in the following chart to provide the owner with the cost information. Then use the completed chart to help you answer the remaining questions:Monthly pizza volume 6,000 7,500 10,000 Total fixed costs Total variable costs Total costs Fixed cost per pizza Variable cost per pizza Average cost per pizza Selling price per pizza S 6.25 S 6.25 S 6.25 Average profit per pizza2) From a cost standpoint, why do companies such as Miller Restaurant want to operate near or at full capacity?3) The owner has been considering ways to increase the sales volume. The owner thinks that 10,000 could be sold per month by cutting the selling price per pizza from $6.25 to $5.75. How much extra profit (above the current level) would be generated if the selling price were to be decreased? (HINT: Find the restaurant's current monthly profit and compare it to the restaurant's projected monthly profit at the new sales price and volume.)
1 answer:
Answer: The answer is provided and attached below.
Explanation:
The explanation for number 1 and 3 has been attached.
2. The break even point is level of production whereby a company makes no profit or loss. When a company operates below the break even point, the company makes a loss and when a company operates above this level, the company make a profit. The higher the level, the higher the profit.
Therefore, from a cost point of view, Miller restaurant and every other company wants to operate at the full or near full capacity in order to earn higher level of profit. At this point, the fixed costs have been recovered, and every additional unit makes up the profit of the company.
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Complete question:
Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5 years.
Year ECB WCB
2004 40.00% 40.00%
2005 -10.00% 15.00%
2006 35.00% -5.00%
2007 -5.00% -10.00%
2008 15.00% 35.00%
a. What is the expected return and risk of each stock?
b. Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? In other words, what is the difference between portfolio's standard deviation and weighted average of components' standard deviations? (Hint: check the example on page 11-12 on my note).
Solution:
The estimated return of the stock is the average profit.
So the average of ECB is (40-10+35-5+15)/5
=
= 15% expected return
WCB expected return = 40+15-5-10+35
=
= 15%
They've had the same planned return.
This is generally defined in the Greek letter Mu, (U) A weighted average may also be used to calculate portfolio volatility.
Standard deviation of ECB is
so for ECB:
=
=6.25%
=
= 0.1225
=
= 0.04
=
= 0.04
=0
now 0.0625+0.1225+0.04+0.04+0=0.265
stdev= = 0.23
So WCB is the same except in a different order to make things quick I'm only going to add the median again WCB=0.23
Then the 60/40 portfolio will be the "weighted average" of the returns.
portfolio returns
2004: (60%*40%)+(40%*40%) = 40%
2005: (60%*-10%)+(40%*15%) = 0%
2006: (60%*35%)+(40%*-5%) = 19%
2007: (60%*-5%)+(40%*-10%) = -7%
2008:(60%*15%)+(40%*35%) = 23%
we have an average return of (40+19-7+23)/5 = 75/5 =15%
The estimated return of all combined stocks is a better way to do so.
we knew they both had expected returns of 15% so we can say
(60%*15%)+(40%*15%)=15% so the portfolio has an expected return of 15%
Now we do the standard deviation for the whole portfolio and get
=
=6.25%
= -
=6.25%
=
= 0.16%
=
= -4.84%
=
= 0.64%
now add them up and get 9.78%
= 13.98%
Therefore, the normal portfolio variance is 13.98 per cent and the predicted portfolio return is 15 per cent.
Every stock has a standard deviation of 23 per cent and an average return of 15 per cent, meaning that the fund has the same estimated return but with less standard deviation. This ensures that the same gain is less costly. It's stronger than any of these products.