Sam is developing a business plan for starting Pizza business in Waltham. Sam sp

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. It costs a total of $ 6 to make a Pepperoni pizza. 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.

Explanation / Answer

A. Computation of estimated demand in the first year:
Demand = number of families *number of pizza's consumed per family per year
Here, Given that average family consumes 10 pizzas per year
Now we need to calculate number of families = 10% of market share of non-vegetarian families
= 10% * (total families - vegetarian families i.e., 20%)
= 10% * (20,000-20%)
= 10% * 16,000 = 1,600 families.

Therefore, estimated demand = 1,600 families * 10 pizzas per year = 16,000pizzas

B. Calculate the % markup (profit margin %) on sales price and total cost in the first year :
Profit margin on sales = profit / sales *100
= sale price - cost / sale price * 100
= 8-6 / 8 *100
= 2/8 *100
= 25%

Profit margin on Total cost = profit / cost *100
= sale price - cost / cost * 100
= 8-6 / 6 *100
= 2/6 *100
= 33.33%

C. Estimate the demand for Pizza in the second year with the new price:
Elasticity = % change in demand / % change in price
0.5 = % change in demand / (8-10/8)
0.5 = % change in demand / (-25%)
% change in demand =0.5 * -25% = -0.125
Therefore Estimated demand = 16,000 + 16,000*(-0.125) = 16,000- 2,000 = 14,000pizzas.

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

= sale price - cost / sale price * 100
= 10-6 / 10 *100
= 4/10 *100
= 40%

Profit margin on Total cost = profit / cost *100
= sale price - cost / cost * 100
= 10-6 / 6 *100
= 4/6 *100
= 66.67%

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