Pricing Practice
A pizza parlor sells its large pizza at $15 each. At that price, the current sales are 1,000 units per week. The variable cost per unit is $5. The management is considering the proposal of running a 20% price promotion. Please answer the following questions:
1) How much do the sales of large pizza have to increase for the price promotion to be profitable, if the cost structure for the parlor does not change due to the promotion?
2) Suppose now that the management believes that it is necessary to spend $400 to advertise the price cut to its customers, how much do sales have to increase now for the price cut to be profitable?
3) To make the problem even more realistic, suppose now that 40% of the customers who buy a large pizza also buy a six-pack of coke (the rest of customers do not buy anything else), from which the pizza parlor makes a dollar net profit, how much do sales have to increase now for the price cut to be profitable?