Question

Question #2:

You own a property on Main Street on which a small, vacant take-out pizza stand sits.  

There are other vacant take-out pizza stands in the same locale (i.e. Main Street) as well as on the less busy Side Street locale.   From your market analysis, you are confident that the sites will attract the following number of pizza sales each month (based on their locale):

Main Street: 450

Side Street:   300

The market price for pizzas in the city is $7.00. You know the cost of running and maintaining a pizza stand (paid by the operator of the business of course) is fixed at $900 per month.

Jobs in another industry which pay $200.00 per month are plentiful in the city and therefore $200.00 is the minimum profit after rent operators must achieve in order for them to run a pizza stand.

Note: If any new assumptions are made, they will continue to be in effect for subsequent questions.

A. What is a potential operator’s monthly profit, before rent, at each of the two locales (Main Street and Side Street)?

Explain with the help of a table.

B. You learn that the Side Street properties are renting for $250 per month on a month-to-month basis. Assume operators can easily (and at no cost) switch from one property to another.

Given that operators can easily setup shop at a Side Street location for $250 per month, how much rent are you able to collect for your Main Street property? Why? Show your work with the help of a table.

C. Seeing how much profit there is to be made in the pizza business (compared to the alternative industry which, as a reminder, pays just $200 per month), would-be pizza stand operators rush to open up new businesses.

With far more be operators in the market than properties available for them, what will the rent for each properties in each of the locales (Main Street and Side Street) eventually stabilize at? Why? Show your work with the help of a table.

D. A local business owner is interested in converting your Main Street pizza stand site into a tanning salon (at no cost to you). The cost of operating the tanning salon is just $400.00. They are confident they’ll attract 80 tanning sessions per month at $25.00 per session.

Will we see a new tanning salon on your site? Why or why not? Show with the help of a table.

E. The evening news reports that demand for pizza is surging in your market. Experts predict that the number of pizzas a Main Street location can sell will double to 900 per month and prices will increase to $10.00 per pizza.

“With monthly profits expected to increase so dramatically, this is a GREAT time to be in the pizza business!” the reporter concludes.

Will the pizza operators at Main Street locations really keep that additional residual profit? Explain why or why not. What business is it really a GREAT time to be in? :-)

Answer 1

A.	Main st.	Side st.
Monthly sales expected	450	300	No.of pizzas
Sales $ at $ 7/pizza	3150	2100
Cost of sales/mth.	900	900
Profit /mth.	2250	1200	Answer to A
Prevailing Rent expense		250
Profit netted		950
so, maximum rent that will be paid for main st.location so as not to net less than a side st.location pizza joint (2250-950)	1300		Answer to B-- $ 1300/mth
profit	950	950

C. Assuming Sales volume, selling price & Cost of sales in A . Above, are constant,
Rent will evetually stabilise at	1300	950	Answer to C

	Pizza	Salon
D.	Main st.
Monthly sales expected	450	80	sessions
Sales $ at $ 7/pizza	3150	2000	each at$ 25
Cost of sales/mth.	900	400
Profit /mth. Before rent	2250	1600
Stabilised Rent	1300	1300
Profit /mth. after rent	950	300
Will we see a new tanning salon on your site?
NO.
As the profit from the salon, is less than that from running a pizza joint.

	Pizza
E.	Main st.
Monthly sales expected	900
Sales $ at $ 10/pizza	9000
Cost of sales/mth.	1800	doubled
Profit /mth. Before rent	7200
Stabilised Rent	1300
Profit /mth. after rent	5900

The main st. pizza sellers can also operate the same in side st. locations, as the profit there ($ 950/mth.) is more than that($ 300) for operating tanning salons , at the main st. itself.

Operating salon at main st.is a mutually exclusive decision--ie. He has to choose between pizza or tanning salon--in which case,rent expense being the same& hence irrelevant.

To make 1600 at salon, he has to forego a profit of 2250 & so he 'll lose (1600-2250)=650 , if he opts for a salon in main. St.

So,

it is best to operate pizza at side st.locations (950 profit), with the residual monet from E above.