Question

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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 $25 million per year. While many of these sales will be to new​ customers, Pisa Pizza estimates that 35% 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 48% 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

a)Computation of Incremental sales associated with introdducing new pizza

Incremental sales=Sales of new pizza-lost sales of Original pizza

= $ 25 Million - 0.35( $ 25 Millin)

= $ 25 Million - $ 7.5 Million

= $ 17.5 Millions

Hence the Incremental sales is $ 17.5 Millions

b) % of Customers who will shift to new pizza if we donot introduce Healthy pizza =48%

That means 52% ( 100% -48% ) of persons who will shift to healthier pizza will be retained by a firm

Incremental Earnings : Sale of New pizza-lost sales of Original pizza from customers who would not have switched

  $ 25 Miions - ( 0.52)( 0.35)( $ 25 Million)

= $ 25 Millions - $ 4.55 Millions

= $ 20.45 Millions.

Hence incremental Earnings are $ 20.45 Millions.