3 Case Studies In Cost-Benefit Analysis

1. Pricing ATM Machines:

A bank in a medium-sized Midwestern city, Firm X, currently charges $1 per transaction at its ATMs. To determine whether to raise price, the bank managers experimented with a number of higher prices (in 25 cent increments) at selected ATMs:

Fee # of Transactions
$2.00 1000
$1.75 1500
$1.50 2000
$1.25 2500
$1.00 3000

The marginal cost of an ATM transaction is $0.50. What ATM fees should the bank charge?

2. Learning Curves:

Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your costs decrease by $6. The first unit costs you $64 to produce. If you receive a request for proposal (RFP) on a project for four units, what is your break-even price? Suppose that if you get the contract. You estimate that you can win another project for two more units. Now what is your break-even price for those two units?

3. Multi-concept Restaurants Are a Growing Trend:

A multiconcept restaurant incorporates two or more restaurants, typically chains, under one roof. Sharing facilities reduces costs of both real estate and labor. The multiconcept restaurants typically offer a limited menu, compared with full-sized, stand-alone restaurant. For example, KMAC operates a combination Kentucky Fried Chicken (KFC)/Taco Bell restaurant. The food preparation areas are separate, but orders are taken at shared point-of- sale (POS) stations. If Taco Bell and KFC share facilities, they reduce fixed cost by 30%; however, sales in joint facilities are 20% lower than sales in two separate fatalities. What do these numbers imply for the decision of when to open a shared facility versus two separate facilities?