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Option 1 Spend $10,000 for online marketing and increase sales 20% to 9,840 boxes (1.2*8,200)
Fixed costs increase by $10,000.
Option 2 Spend $10,000 and reduce variable cost by 10% to $8.892 per box
Fixed costs increase by $10,000.
Total revenue (R) = Price (P) x Quantity (Q)
EXCEL-BASED PROBLEMS
For these problems, you may use Excel or the spreadsheet templates in MindTap to assist in
your analysis.
37. Edwards Machine Tools needs to purchase a new machine. The basic model is slower but
costs less, while the advanced model is faster but costs more. Profitability will depend on
future demand. The following table presents an estimate of profits over the next three years.
Given the uncertainty associated with the demand volume, and no other information to
work with, how would you make a decision? Use the Excel template Decision Analysis and
explain your reasoning.
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38. Suppose that in Problem 37, a forecasting study determines that he probabilities of
demand volume are Low = 0.2, Medium = 0.2, and High = 0.6. Use the Excel template
Decision Analysis to determine the expected value decision. How appropriate is it to use
this criterion? Interpret EVPI, the expected value of perfect information.
The Excel template results are:
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We see that the expected profit for the advanced machine is $162,000 while it is only
$126,000 for the basic model. Thus, the advanced machine should be chosen using this
criterion. Expected value should only apply to repeated decisions. As this is a one-time
With perfect information, we would make the following decisions:
If the future event (demand volume) will be low, then choose the basic model; if the future
event will be medium, choose advanced; and if the future event will be high, choose
advanced. The expected value for these decisions would be
0.2(80,000) + 0.2(110,000) + 0.6(220,000) = $170,000
39. A company is considering three vendors for purchasing a CRM system, Delphi Inc., CRM
International, and Murray Analytics. The costs of the system are expected to depend on
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implementation durations. Use the Excel template Decision Analysis to identify what
vendor to select. Clearly explain your recommendation.
40. A hospital is evaluating whether to outsource or perform in-house a large set of blood and urine
laboratory tests. The fixed cost of the laboratory equipment located in the hospital is $800,000
and the weighted average variable cost per test if performed in-house is $28.75. A third-party lab
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41. Suzy’s Temporary Employee (STE) business, located in a big city, can do an on–line criminal
background check in-house for $1.29 per search with a fixed cost of $29,000. A third party
on-line security firm offered to do a similar security search for $8.00 per person with an
annual service contract with STE. If STE’s forecast is 3,000 searches next year, should STE
continue to do the search in-house or accept the third-party offer? ? Use the Excel template
Break-Even to determine the best decision. What other criteria are important in making this
decision?
Using the Break-Even template for outsourcing, we have:
Other criteria include the risk/difficulty to STE being in an annual service contract and
escalating search prices over time (i.e., $8/search 1st year, $9/search 2nd year, etc.). The
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42. A manager of Paris Manufacturing that produces computer hard drives is planning to lease
a new automated inspection system. The manager believes the new system will be more
accurate than the current manual inspection process. The firm has had problems with hard
drive defects in the past and the automated system should help catch these defects before
the drives are shipped to the final assembly manufacturer. The relevant information follows.
a. Suppose annual demand is 8,000 units. Use the Excel template Break-Even to determine
whether or not the firm should lease the new inspection system.
Using the Break-Even template for a Technology Choice Decision, we have:
b. Use the Excel Goal Seek tool to find the break-even quantity.
If demand is less than 8,305 then the current manual system is preferred; otherwise choose
the automated system. See the template results below.
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43. Assume the cost factors given in Problem 42 have not changed. A marketing representative
of NEW-SPEC, a firm that specializes in providing manual inspection processes for other
firms, approached Paris Manufacturing and offered to inspect parts for $19 each with no
fixed cost. They assured Paris Manufacturing the accuracy and quality of their manual
inspections would equal the automated inspection system. Demand for the upcoming year
is forecast to be 8,000 units. Should the manufacturer accept the offer? Use the Excel
template Break-Even to make your recommendation.
Using the Break-Even template for a Technology Choice Decision, we have:
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Teaching Note: RoboJet Car Wash
Overview
Caroline and Drew Ebel were contemplating buying a car wash franchise as a family business.
Their two kids, Jasime and Luke, and the dog, Lilly, were a close-knit family that were tired of
the bureaucracy of corporate and government jobs. The objective of this case is to consider
Case Questions for Discussion:
1. How might the strategy, mission, competitive priorities, and customer benefit package of
this business affect their technology decisions?
Mission: Dedicated to providing a premium car wash and customer experience.
Competitive priorities: #1 high quality vehicle wash, #2 high service quality such as friendly
professional service-providers, and cross-selling detailing, dent, and windshield services, #3
2. What issues and problems should you anticipate with managing this business, particularly
with respect to technology? What role does operations play in successfully handling
these issues and problems?
A few of the activities that operations must handle to manage and run an effective car wash
business are as follows:
• Co-production issues such as ensuring customer self-service tasks such as closing
windows, removing antennas and turn off radio so antenna retracts, unlocking all doors,
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• Predicting demand and scheduling staff on a daily, weekly, and monthly basis. How
many staff associates do we need on a cloudy, rainy, and beautiful day by day of the
week? (That is, issues of demand forecasting, capacity, and scheduling.)
• Competitor analysis and benchmarking.
• Disposal of dirty waste water and chemicals in a sustainable way.
• Finding and keeping a good general (operations) manager to manage the facility.
• A high degree of quality control in all aspects of the business including environmental
safety and disposal of solvents and chemicals.
3. What does a break-even analysis tell you about this business venture? What if they could
reduce variable cost and/or increase the average price per wash?
A spreadsheet similar to the following one can be set up for breakeven analysis. In the case, we
fixed selling price and the current variable cost to make the BEA more predictable. Students will
make different assumptions about fixed costs so their solutions will differ. Some students will
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As you can see from the results below, raising price to $26 per vehicle generates more profit
and lowers the break-even quantity.
RoboJet Car Wash Breakeven Quantity Analysis RoboJet Car Wash Breakeven Quantity Analysis
Assume FC 72,000$ Assume FC 72,000$
Variable cost $15.16 Variable cost $11.00
Selling price $26.00 Selling price $26.00
Cars Washed Cars Washed
per Year Total revenue Total cost Total profit per Year Total revenue Total cost Total profit
6000 156,000$ 162,960$ (6,960)$ 6000 156,000$ 138,000$ 18,000$
8000 208,000$ 193,280$ 14,720$ 8000 208,000$ 160,000$ 48,000$
The two-way data table that follows varies price from $16 to $26 per car and variable cost from
$11 to $15 per car. It shows that controlling variable cost is one key to profitability and if the
market is amenable to higher prices the breakeven number of cars is low (such as a breakeven
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Data Table RoboJet Car Wash Breakeven Quantity Analysis
Variable cost Variable cost Variable cost
10,526 11 12 13 14 15
16 14400 18000 24000 36000 72000
4. Should Drew and Caroline go into this business?
Most students will say yes. First, going into this business does fit with Caroline and Drew’s
dream of working together and avoiding the bureaucracy of past corporate and government
jobs. Second, for the ‘what if’ of a selling price of $24, a variable cost of $14, a fixed cost of
RoboJet Car Wash Breakeven Quantity Analysis
Assume FC 72,000$
Variable cost $14.00
Selling price $24.00
Cars Washed
per Year Total revenue Total cost Total profit
6000 144,000$ 156,000$ (12,000)$
Teaching Plan
1. How might the strategy, mission, competitive priorities, and customer benefit package
of this business affect their technology decisions?
2. What issues and problems should you anticipate with managing this business,
particularly with respect to technology? What role does operations play in successfully
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Case Teaching Notes: Bracket International – The RFID Decision
Overview
The case introduces the student to RFID criteria and decisions as a CEO, Mr. Jack Bracket,
considers replacing the bar coding system used in three factories with a RFID system. Some of
RFID’s costs and benefits can be used to compute a payback. Both qualitative and economic
Case Questions and Brief Answers
1. How does RFID compare to bar-coding?
By searching the Internet and library, summarize the advantages and disadvantages of RFID
systems. Did you find any RFID applications for services? (maximum of two pages)
Student will find many advantages and disadvantages such as:
Advantages of RFID
• No line of sight required to read
• Less theft and miss-placed inventory
Disadvantages of RFID
• High costs of readers, tags, systems
• Not so good for liquids and metals
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• Damage/interference from static electricity, water, heat, etc.
• Unproven technology w/o a critical mass of users
How does RFID compare to bar-coding?
• RFID faster and can speed up entire supply chain
• Ability to update RFID information in tags and readers
2. What is the economic payback in years for this possible RFID adoption? (Hint: There are
two benefits that can be quantified – labor savings due to faster scan times and miss-read
savings. Annual benefits divided by economic benefits equals’ payback.)
Students will calculate economic paybacks from 1 to 4 years depending on their assumptions
(some of which are wrong, not needed, or beyond the case facts). If they stick to the case facts
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Bracket International – The RFID Decision – Numerical Solution
Average Total Inventory
Sales
$78,000,000
Inventory Days Supply (IDS) =
Cost of Goods Sold per Day
Cost of Goods Sold
$61,000,000
Average Inventory
$14,000,000
CGS/Day =
$234,615.38
($61,000,000/260)
Factory Operates
days/year
($14,000,000/$234,615)
Miss Reads Bar Code %
Miss Reads RFID %
Students often convert to hours so
No. Items Scanned/Day
all 3
factories
(25,610,000/3600) = 7,114 hours and
7,114/2000 = 3.56 people
No. Items Scanned/Yr
(9,850*260)
Bar Code Scan Time/Item (seconds) =
No. Scan Seconds/Yr
25,610,000
[(10 sec/item)(260)(9,850)]
One Full Time Equivalent Employee Time (Hours) per Year =
2,000
One Full Time Equivalent Employee Time (Seconds) per Year =
(2,000*3600)
=
3.56
people (25,610,000/7,200,000)
Total Labor $ Saved Due to Scan Time Reduction =
$245,429
(3.56*$69,000)
No of Miss Read
Savings
46,098
(0.02 – 0.002)(25,610,000)
$ Saved Due to Miss Read Reduction
Annual Cost Savings
You do not have enough case information to do a
RFID Investment Costs
NPV cash flow analysis over years 0 to n so a
Readers, Scnners, Tags
$620,000
New Operating
$480,000
Total Cost
$1,100,000
simple payback is most appropriate.
Simple Payback (years)
2.56
(annual cost savings/benefits)
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3. What are the risks of adopting a new technology too early? Too late?
You can define first adopter and fast follower and write two headings on the board. The two key
questions are: What to adopt? When to adopt? Obviously, a first adopter benefits from an early
4. What do you recommend Mr. Bracket do in the short– and long-term? Explain your
reasoning.
Short-term Recommendations/Actions
• Do not adopt RFID now (firm is too small, too big a risk, etc.)
Long-term Recommendations/Actions
• Watch RFID technology and supply chain players and kept track of what competitors are
doing
Teaching Plan
You can begin class by asking your students if they have seen bar-coding in action, and of
course they will say yes. Ask them to describe the situation (retail, education, warehouses,
trucking, etc.) and point out possible advantages and disadvantages of bar-coding technology.
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Teaching Note: Hudson Jewelers
A complete teaching note for all chapters is available in the Instructor Resources online.
Instructors should read the entire case and most of the case assignments at the end of each
chapter. Then decide if you want to assign all or part of the case questions.
Chapter 4 Case Questions for Discussion:
1. What are the advantages and disadvantages from the service provider’s (jeweler’s)
perspective of using “design your own ring” 3D/CAD technology at the retail store level?
What are the risks from the customer’s viewpoint?
Advantages
• Design flexibility (mass customization)
• Build customer loyalty
• Product variety (customer sees tens of thousands of alternative ring designs and
mountings via CAD versus hundreds via a traditional non-CAD store)
• Introduce 3D design technology to the retail store
Disadvantages
• Warranty and claims policy when things go wrong (customer doesn’t like the custom
designed ring once it is delivered; technology documents the design but what was
manufactured was not as expected)
• Long hours of co-designing the ring uses valuable employee time so you need resource
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Risks
• Some of the disadvantages are risks to the customer.
• The customer actually buys unethical or blood or synthetic diamonds.
David’s Bridal magazine did a survey and found 57% of women are unhappy with their
engagement ring.
2. Research jewelry retail store software programs and summarize their capabilities in terms
of customer relationship management, accounting, point of sale, inventory management,
payment systems, and customer loyalty programs. Provide references.
Students will discover many retail software packages available that do these functions such as
ERPLY, EDGE, GEMINI, GENVISION, CHAINDRIVE, MICO-BIZ, MATRIX CAD, and Visual Retail Plus.
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• Payment Systems: A large variety of payment options and systems work with GEMINI. Using
multiple forms of payments, out of country currency, layaway and gift cards/certificates are
some of the forms of payments available. On the associates’ side, there is the ability to split
commission up to three ways.
• Customer Loyalty Programs: GEMINI has the ability for a customer loyalty program or a
point based system. Loyalty programs allow the business to endure having high contact with
the customers overall improving the customer experience. This allows for customers to earn
points towards future purchases and increases repeat business.
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Example – Visual Retail Plus Cites
1.) http://www.possoftwareguide.com/pos-summary.asp?ProductID=54
1. Customer Relationship Management
– The ability to store customer information
2. Inventory Management
– Seasonal planning (can calculate recommendations for new orders while tracking
3. Point of sale
– Automatic price changes can be made by time and date
4. Customer Loyalty Programs
– Ability to swipe and authorize loyalty cards at POS
each purchase
5. Accounting
– Capable of performing payroll processing, which performs the necessary employee
payroll, processing calculations, including tax withholding, overtime payments, positions
worked, and year to date income amounts for all employees