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?
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 $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?
Solution
a. The level of incremental sales associated with introducing the new pizza can be calculated as follows:
First, we need to determine the sales that are expected to come from customers who switch from the original pizza to the new pizza. This is 40% of the total expected sales, which is 0.40 * 8 million.
Since these sales are not really new (they are just shifting from one product to another), we need to subtract them from the total expected sales to find the incremental sales. So, the incremental sales would be 8 million = $12 million.
b. In this case, if Pisa Pizza does not introduce a healthier pizza, 50% of the customers who would have switched to the healthier pizza will switch to another brand. This means that Pisa Pizza would lose 50% of the 4 million.
So, if Pisa Pizza introduces the healthier pizza, it will not only gain the 4 million in sales. Therefore, the total level of incremental sales in this case would be 4 million = $16 million.
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