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 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

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