Chapter 8, Problem 1P

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 $20 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.

1. a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza?
2. b. Suppose that 50% 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?

Summary Introduction

To determine: The level of incremental sales is associated with introducing new pizza.

Introduction:

Answer to Problem 1P

The level of incremental sales is associated with introducing a new pizza is $12,000,000.

Explanation of Solution

Given information:

Sales of the new pizza: $20,000,000.

Percentage of customer switch: 40.00%.

Formula used to calculate incremental sales:

$\begin{array}{c}\text{Incremental sales}=\text{Sales of new pizza }–\text{Lost sales of original}\\ \text{=Sales of new pizza }–\left(\begin{array}{l}\text{Percentage of customer switch}\times \\ \text{Sales of new pizza}\end{array}\right)\end{array}$

Calculation of the incremental sales:

$\begin{array}{c}\text{Incremental sales}=\text{Sales of new pizza}-\text{Lost sales of original}\\ =\$20,000,000-\left(40.00\%\times \$20,000,000\right)\\ =\$20,000,000-\$8,000,000\\ =\$12,000,000\end{array}$

Therefore, the incremental sale is $12,000,000.

Summary Introduction

To determine: The level of incremental sales is associated with introducing a new pizza in the given case.

Given case: Suppose that 50% 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.

Answer to Problem 1P

The level of incremental sales is associated with introducing a new pizza in the given case is $16,000,000.

Explanation of Solution

Formula used to calculate incremental sales:

$\begin{array}{c}\text{Incremental sales}=\text{Sales of new pizza }–\text{Lost sales of original}\\ \text{=Sales of new pizza }–\left(\begin{array}{l}\text{Percentage of customer switch}\times \\ \text{Percentage of customer switch another}\text{brand}\times \\ \text{Sales of new pizza}\end{array}\right)\end{array}$

Calculation of the incremental sales:

$\begin{array}{c}\text{Incremental sales}=\text{Sales of new pizza }–\text{Lost sales of original}\\ \text{=Sales of new pizza }–\left(\begin{array}{l}\text{Percentage of customer switch}\times \\ \text{Percentage of customer switch another}\text{brand}\times \\ \text{Sales of new pizza}\end{array}\right)\\ =\$20,000,000-\left(50.00\%\times 40.00\%\times \$20,000,000\right)\\ =\$20,000,000- \$ 4,000,000.00\\ =\$16,000,000\end{array}$

Therefore, the incremental sale is $16,000,000.