Question

Pisa Pizza, a seller of frozen pizza, is considering introducting a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of new pizza will be $20 million per year. While many of these sales will be to new customers, Pisa Pizza estimaes that 40% will come from customers who switch to the new, healthier pizzai nstead of buying the original version.

a) Assume cusotmer will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza?

b) Suppose that 50% of hte cusomters who will switch from Pisa Pizza's orignial pizza to its healthier pizza will switch to another brand if Pisa PIzza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case?

Answer 1

Part 1:

Level of incremental sales is associated with introducing the new pizza= $12 million

Part 2:

Level of incremental sales is associated with introducing the new pizza=$16 million.

Step-by-step explanation:

Given Data:

Expected sales of new pizza=$20 million per year

Percentage of Loss on buying the original version=40%=0.40

Amount of Loss on buying the original version=0.40*$20 million

Amount of Loss on buying the original version=$8 million.

Required:

1. What level of incremental sales is associated with introducing the new pizza?
2. What level of incremental sales is associated with introducing the new pizza in this case when 50% of the customers who to its healthier pizza will switch to another brand ?

Solution::

Part 1:

Level of incremental sales is associated with introducing the new pizza= Expected sales of new pizza-lost sales of original

Level of incremental sales is associated with introducing the new pizza=$20 million-$8 million

Level of incremental sales is associated with introducing the new pizza= $12 million

Part 2:

Level of incremental sales is associated with introducing the new pizza=Expected sales of new pizza - lost sales from customers who do not Switched

Level of incremental sales is associated with introducing the new pizza=$20 million-0.5*$8 million

Level of incremental sales is associated with introducing the new pizza=$16 million.