4. Sam is developing a business plan for starting Pizza business in Waltham. Sam
ID: 2740480 • Letter: 4
Question
4. 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 $2 in the second year. Price elasticity of demand for pizza is 0.50
Estimate the demand for Sam’s pizza in the first year
Calculate the % markup (profit margin %) on sales price and total cost in the first year
Estimate the demand for Pizza in the second year with the new price.
Explanation / Answer
Total No. of families 20000
Non Vegetarains 16000 ( 20000*80%)
His estimated Market Share 1600 (16000*10%)
Estimated Total Pizzas 16000 (1600*10) IN first year
2) Total Cost In 1st year 96000$ (16000*6)
%mark UP on Sale price (8-6)/8 25%
%mark up on total cost (8-6)/6 33.333%
3) Price Elasticity =0.5
%change in quantity /% change in price = 0.5
x/(2/8) = 0.5
x=25% change in quantity
New Quantity = 16000*75% =12000 =2nd year demand
because there is decrease in quantity of 25%
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