Question

Pricing Practice A pizza parlor sells its large pizza at $15 each. At that price, the current sales are 1,000 units per week. The variable cost per unit is $5. The management is considering the proposal of running a 20% price promotion. Please answer the following questions:

1) How much do the sales of large pizza have to increase for the price promotion to be profitable, if the cost structure for the parlor does not change due to the promotion?
2) Suppose now that the management believes that it is necessary to spend $400 to advertise the price cut to its customers, how much do sales have to increase now for the price cut to be profitable?
3)To make the problem even more realistic, suppose now that 40% of the customers who buy a large pizza also buy a six-pack of coke (the rest of customers do not buy anything else), from which the pizza parlor makes a dollar net profit, how much do sales have to increase now for the price cut to be profitable?

Answer 1

Selling price = $ 15

Variable cost = $ 5

Sales per week = 1000 units

Price promotion = 20%

New selling price after price promotion = 15*(1-.2) = $ 12

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1)

Total profit before price promotion = 1000*(15-5) = $ 10,000 per week

New profit contribution per unit, after price promotion = 12-5 = $ 7

Sales required = Total profit before price promotion / New profit contribution per unit

= 10000 / 7

= 1429 units

Increase in sales required = 1429 - 1000

= 429 units (over and above the existing sales of 1000 units)

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2)

Total sales required = (profit before price promotion + Advertising expense) / New profit per unit

= (10000+400)/7

= 1486 units

Total Increase in sales required = 1486 - 1000

= 486 units (over and above the existing sales of 1000 units)

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3)

New profit per unit = 7+1 = $ 8

Total sales required = (profit before price promotion + Advertising expense) / New profit per unit

= (10000+400)/8

= 1300 units

Increase in sales required = 1300 - 1000

= 300 units

Step-by-step explanation: