Assignment -

Problem 1 - The Retread Tire Company recaps tires. The fixed annual cost of the recapping operation is $60,000. The variable cost of recapping a tire is $9. The company charges $25 to recap a tire.

a. For an annual volume of 12,000 tires, determine the total cost, total revenue, and profit.

b. Determine the annual break-even volume for the Retread Tire Company operation.

Problem 2 - If the maximum operating capacity of the Retread Tire Company, as described in Problem 1, is 8,000 tires annually, determine the break-even volume as a percentage of that capacity.

Problem 3 - If the Retread Tire Company on Problem 1 changes its prices for recapping a tire from $25 to $31, what effect will the change have on the break-even volume?

Problem 4 - The General Store at State University is an auxiliary bookstore located near the dormitories that sells academic supplies, toiletries, sweatshirts and T-shirts, magazines, packaged food items, and canned soft drinks and fruit drinks. The manager of the store has noticed that several pizza delivery services near campus make frequent deliveries. The manager is therefore considering selling pizza at the store. She could buy premade frozen pizzas and heat them in an oven. The cost of the oven and freezer would be $27,000. The frozen pizzas cost $3.75 each to buy from a distributor and to prepare (including labor and a box). To be competitive with the local delivery services, the manager believes she should sell the pizzas for $8.95 apiece. The manager needs to write up a proposal for the university's director of auxiliary services.

a. Determine how many pizzas would have to be sold to break even.

b. If the General Store sells 20pizzas per day, how many days would it take to break even?

c. The manager of the store anticipates that once the local pizza delivery services start losing business, they will react by cutting prices. If after a month (30 days) the manager has to lower the price of a pizza to $7.95 to keep demand at 20 pizzas per day, as she expects, what win the new break-even point be, and how long will it take the store to break even?

Problem 5 - Kim Davis has decided to purchase a cellular phone, but she is unsure about which rate plan to select. The "regular" plan charges a fixed fee of $55 per month for 1,000 minutes of airtime plus $0.33 per minute for any time over 1,000 minutes. The "executive" plan charges a fixed fee of $100 per month for 1,200 minutes of airtime plus $0.25 per minute over 1,200 minutes.

a. If Kim expects to use the phone for 21 hours per month, which plan should she select?

b. At what level of use would Kim be indifferent between the two plans?

Problem 6 - The College of Business at Tech is planning to begin an online MBA program. The initial start-up cost for computing equipment, facilities, course development, and staff recruitment and development is $350,000. The college plans to charge tuition of $18,000 per student per year.

However, the university administration will charge the college $12,000 per student for the first 100 students enrolled each year for administrative costs and its share of the tuition payments.

a. How many students does the college need to enroll in the first year to break even?

b. If the college can enroll 75 students the first year, how much profit will it make?

c. The college believes it can increase tuition to $24,000, but doing so would reduce enrollment to 35. Should the college consider doing this?

Problem 7 - The owners of Backstreets Italian Restaurant are considering starting a delivery service for pizza and their other Italian dishes in the small college town where they are located. They can purchase a used delivery van and have it painted with their name and logo for $21,500. They can hire part-time drivers who will work in the evenings from 5 P.M. to 10 P.M. for $8 per hour. The drivers are mostly college students who study at the restaurant when they are not making deliveries. During the day, there are so few deliveries that the regular employees can handle them. The owners estimate that the van will last 5 years (365 days per year) before it has to be replaced and that each delivery will cost about $1.35 in gas and other maintenance costs (including tires, oil, scheduled service, etc.). They also estimate that on average each delivery order will cost $15 for direct labor and ingredients to prepare and package, and will generate $34 in revenue.

a. How many delivery orders must Backstreets make each month in order for the service to break even?

b. The owners believe that if they have approximately the break-even number of deliveries during the week, they will at least double that number on Fridays, Saturdays, and Sundays. If that's the case, how much profit will they make, at a minimum, from their delivery service each month (4 weeks per month)?

Problem 8 - Kathleen Taylor is a high school student who has been investigating the possibility of mowing lawns for a summer job. She has a couple of friends she thinks she could hire on an hourly basis per job. The equipment, including two new lawnmowers and weed-eaters, would cost her $500, and she estimates her cost per lawn, based on the time required to pay her friends to mow an average residential lawn (and not including her own labor) and gas for driving to the jobs and mowing, would be about $14.

a. If she charges customers $30 per lawn, how many lawns would she need to mow to break even?

b. Kathleen has 8 weeks available to mow lawns before school starts again, and she estimates that she can get enough customers to mow at least three lawns per day, 6 days per week. How much money can she expect to make over the summer?

c. Kathleen believes she can get more business if she lowers her price per lawn. If she lowers her price to $25 per lawn and increases her number of jobs to four per day (which is about all she can handle anyway), should she make this decision?

Problem 9 - Case Problem

CONSTRUCTING A DOWNTOWN PARKING LOT IN DRAPER

The town of Draper, with a population of 20,000, sits adjacent to State University, which has an enrollment of 27,000 students. Downtown Draper merchants have long complained about the lack of parking available to their customers. This is one primary reason for the steady migration of downtown businesses to a mall several miles outside town. The local chamber of commerce has finally convinced the town council to consider the construction of a new multilevel indoor parking facility downtown. Kelly Mattingly, the town's public works director, has developed plans for a facility that would cost $4.5 million to construct. To pay for the project, the town would sell municipal bonds with a duration of 30 years at 8% interest. Kelly also estimates that five employees would be required to operate the lot on a daily basis, at a total annual cost of $140,000. It is estimated that each car that enters the lot would park for an average of 2.5 hours and pay an average fee of $3.20. Further, it is estimated that each car that parks in the lot would (on average) cost the town $0.60 in annual maintenance for cleaning and repairs to the facility. Most of the downtown businesses (which include a number of restaurants) are open 7 days per week.

A. Using break-even analysis, determine the number of cars that would have to park in the lot on an annual basis to pay off the project in the 30-year time frame.

B. From the results in (A), determine the approximate number of cars that would have to park in the lot on a daily basis. Does this seem to be a reasonable number to achieve, given the size of the town and college population?

Problem 10 - THE CLEAN CLOTHES CORNER LAUNDRY

When Molly Lai purchased the Clean Clothes Corner Laundry, she thought that because it was in a good location near several high-income neighborhoods, she would automatically generate good business if she improved the laundry's physical appearance. Thus, she initially invested a lot of her cash reserves in remodeling the exterior and interior of the laundry. However, she just about broke even in the year following her acquisition of the laundry, which she didn't feel was a sufficient return, given how hard she had worked. Molly didn't realize that the dry-cleaning business is very competitive and that success is based more on price and quality service, including quickness of service, than on the laundry's appearance.

In order to improve her service, Molly is considering purchasing new dry-cleaning equipment, including a pressing machine that could substantially increase the speed at which she can dry-clean clothes and improve their appearance. The new machinery costs $16,200 installed and can clean 40 clothes items per hour (or 320 items per day). Molly estimates her variable costs to be $0.25 per item dry-cleaned, which will not change if she purchases the new equipment. Her current fixed costs are $1,700 per month. She charges customers $1.10 per clothing item.

A. What is Molly's current monthly volume?

B. If Molly purchases the new equipment, how many additional items will she have to dry-clean each month to break even?

C. Molly estimates that with the new equipment she can increase her volume to 4,300 items per month. What monthly profit would she realize with that level of business during the next 3 years? After 3 years?

D. Molly believes that if she doesn't buy the new equipment but lowers her price to $0.99 per item, she will increase her business volume. If she lowers her price, what will her new break-even volume be? If her price reduction results in a monthly volume of 3,800 items, what will her monthly profit be?

E. Molly estimates that if she purchases the new equipment and lowers her price to $0.99 per item, her volume will increase to about 4,700 units per month. Based on the local market, that is the largest volume she can realistically expect. What should Molly do?