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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 $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.
- 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 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?
a.
To determine: The level of incremental sales is associated with introducing new pizza.
Introduction:
Answer to Problem 1P
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:
Calculation of the incremental sales:
Therefore, the incremental sale is $12,000,000.
b.
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
Explanation of Solution
Formula used to calculate incremental sales:
Calculation of the incremental sales:
Therefore, the incremental sale is $16,000,000.
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Chapter 8 Solutions
Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
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Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College