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

$ 15$15

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

45 %45%

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

58 %58%

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

Ans.

a) By assuming that the customers will spend the same amount on either version, The level of incremental sales associated with introducing the new​ pizza is computed by reducing the lost sale of original Pizza from the sales of new pizza.

Sales of new pizza – lost sales of original pizza = $ 15 – 0.45($ 15 ) = $15 - $ 6.75 = $8.25 million

b)

If 58%  of the customers 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. The level of incremental sales associated with introducing the new pizza in this​ case is computed as by reducing the lost sale of original pizza from the customers who would not have switch brands from the sale of new pizza.

Customers who will switch is given = 58%

Customers who will not switch = (1 - 0.58) = 0.42 or 42%

Sales of new pizza – lost sales of original pizza from customers who would not have switched brands

= $ 15 – (1- 0.58) (0.45)($ 15) = $ 15 - (0.42)(0.45)($15)

= $ 15 - $ 2.835 = $ 12.165 million