Question

Requirement 3. The owner has been considering ways to increase the sales volume. The owner thinks that 10,000 pizzas could be sold per month by cutting the selling price per pizza from $6.25 to $5.75. How much extra profit​ (above the current​ level) would be generated if the selling price were to be​ decreased? (Hint: Find the​ restaurant's current monthly profit and compare it to the​ restaurant's projected monthly profit at the new sales price and​ volume.) Identify the profit formula and compute the monthly profit at the current and the new volume.

Answer 1

Answer and Explanation:

The computation of the extra profit above the current level is shown below:

Volume New 10,000 units Old 7,500 units

Selling Price $57,500 $46,875

(10,000 × $5.75) (7,500 × $6.25)

Less:

Variable cost at $1.55 ($15,500) ($11,625)

(10,000 × $1.55) (7,500 × $1.55)

Less:

Fixed Cost ($12,000) ($12,000)

Profit $30,000 $23,250

As it can be seen that there is an extra profit of $6,750

= $30,000 - $23,250

= $6,750

So, the company should able to reduce the selling price per unit at 10,000 units

Here profit formula is

Profit = Sales - variable cost - fixed cost