Question

Pisa​ Pizza, a seller of frozen​ pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $ 21 million per year. While many of these sales will be to new​ customers, Pisa Pizza estimates that 40 % will come from customers who switch to the​ new, healthier pizza instead of buying the original version. a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new​ pizza? b. Suppose that 42 % of the customers who will switch from Pisa​ Pizza's original 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 a

Incremental Sales = New Sale - Lost sales of Actual Pizza

Incremental Sales = 21,000,000 - (40% × 21,000,000)

Incremental Sales = $ 12,600,000

Thus the incremental sales connected in introducing of the new pizza is $12.6 Million.

Part b

Incremental Sales = New Sale - Lost Sales from Customer switching Brand

Incremental Sales = 21,000,000 - [42% × (40%) × (21,000,000)

Incremental Sales = 21,000,000 - 3528000

Incremental Sales = $17,472,000

Therefore, the incremental sales linked to introduce the new brand pizza in case (b) is $17.472 Million.

Answer 2

a. The incremental sales associated with introducing the new pizza under the assumption of equal spending are $8.4 million.

b. In the scenario where 42% of switchers would choose another brand, the incremental sales are $12.04 million.

Step-by-step explanation:

a. Incremental sales with equal spending:

Original pizza sales: Unknown, but let's call it X.

New pizza sales from new customers: 60% of $21 million = $12.6 million.

New pizza sales from switchers: 40% of X.

Total new pizza sales: $12.6 million + 0.4X.

Incremental sales: Difference between total new pizza sales and original pizza sales: ($12.6 million + 0.4X) - X = $8.4 million.

b. Incremental sales with brand switching:

Switchers from original pizza: 40% of X.

Switchers to healthier pizza: 58% of switchers = 0.58 * 40% of X = 0.232X.

Switchers to another brand: 42% of switchers = 0.42 * 40% of X = 0.172X.

New pizza sales from switchers: 0.232X.

Sales lost to another brand: 0.172X.

Total new pizza sales: $12.6 million + 0.232X.

Net incremental sales: Difference between total new pizza sales and sales lost to another brand: ($12.6 million + 0.232X) - 0.172X = $12.04 million.

Therefore, introducing the new pizza leads to higher incremental sales even when accounting for customers switching to another brand, highlighting the potential market opportunity for healthier options.