Question

A pizza parlor is choosing between selling slices for $1 each, or for $1.50 with a $2.00 refund

(the $1.50 plus another 50 cents) if the customer is unhappy.

a) If the shop owner thinks 25% of customers will want the refund, what will be the price?

b) If the shop owner thinks 15% of customers will want the refund, what will be the price?

c) If the shop owner thinks 10% of customers will want the refund, what will be the price?

Answer 1

For the sake of simplicity, let there be 100 customers.

a.

If the price is $1 then total sales price = 100 *$1 = $100

If the price is $1.5 then total sales price = 100 * $1.5 = $150.

But 25 customers will be unhappy so the refund amount = 25 * $2 = $50

Thus, net sales = $150 - $50 = $100

Both the prices give the same net sales of $100. Either can be chosen.

b.

If the price is $1 then total sales price = 100 *$1 = $100

If the price is $1.5 then total sales price = 100 * $1.5 = $150.

But 15 customers will be unhappy so the refund amount = 15 * $2 = $30

Thus, net sales = $150 - $30 = $120

Clearly, the $1.5 price is more profitable.

c.

If the price is $1 then total sales price = 100 *$1 = $100

If the price is $1.5 then total sales price = 100 * $1.5 = $150.

But 10 customers will be unhappy so the refund amount = 10 * $2 = $20

Thus, net sales = $150 - $20 = $130

Clearly, the $1.5 price is more profitable.