Question

Sam is developing a business plan for starting Pizza business in Waltham. Sam specializes in pepperoni pizza. Based on the secondary data he has found out that there are 20,000 families in the area and about 20% of these families are strict vegetarians. He believes that he can get 10% of the market share of the potential customers. His research reveals an average family consumes 10 pizzas per year.

Dough costs $5 per pizza and annual lease for the plant is $16000 . Sam is planning to introduce his Pepperoni pizza at $8 and raise the price by $2 in the second year. Price elasticity of demand for pizza is 0.50

a. Estimate the demand for Sam’s pizza in the first year.

b. Calculate the % markup (profit margin %) on sales price and total cost in the first year.

c. Estimate the demand for Pizza in the second year with the new price.

d. Calculate the % mark up on sales price and total cost in the second year.

Answer 1

Ques.8
Ans.(a)	Calculation for Demand for Sam's Pizza in the first year:
	Demand For Pizza (in first year)=			(Total number of families x Potential Customers ) x Ave.Pizza purchased per year
			=	( 20,000 x 80% ) x10% x 10
			=	16,000
Ans.(b)	Calculation of the Total cost (in first year) =				Variable Cost + Fixed Cost
				=	( 16,000 x $5 ) + $16,000
				=	$    96,000
		Markup % on Sales (in First year)=		( Total sales-Total Cost / Total sales )
			=	( $1,28,000 -$96,000 ) / $1,28,000
			=	0.25 or 25%
		Work.Note:
		1) Total sale=	Quantity Demanded x Sale Price
		=	16,000 x $8
		=	$     128,000
	Ans.(c)	Calculation for Demand for Sam's Pizza in the Second year:
		Price Elasticity of Demand=		% change in Quantity / % Change in Price
			0.50 =	% Change in Quantity / 20
		% change in Quantity =		0.50 x 20%
			=	10
		Here, % Change in Price = (New - Old) / New
			=	(10-8)/10
			=	20%
		Thererfore, Demand for Sam's Pizza in the Second year =
		=	16,000 + (16,000 x 10%)
		=	17,600
	Ans.(d)	Calculation of the Total cost (in Second year) =				Variable Cost + Fixed Cost
					=	( 17,600 x $5 ) + $16,000
					=	$ 104,000
		Markup % on Sales(in Second year) =			( Total sales-Total Cost / Total sales )
				=	( $1,76,000 -$104,000 ) / $1,76,000
				=	0.4090 or 40.90%
		Work.Note:
		1) Total sale Value =		Quantity Demanded x Sale Price
			=	17,600 x $10
			=	$     176,000