1. Founded in 1985, Starbucks Corporation offers brewed coffees, espresso bevera

ID: 1131499 • Letter: 1

Question

1. Founded in 1985, Starbucks Corporation offers brewed coffees, espresso beverages, cold blended beverages, various complementary food items, and related products at over 12,000 retail outlets in the United States, Canada, the United Kingdom, Thailand, Australia, Germany, China, Singapore, Puerto Rico, Chile, and Ireland. Over 100 outlets are featured in the Greater Chicago Land area alone. For a new unit in Chicago's O'Hare Airport, suppose beverage customers spend an average $4 on beverages with an 80 percent gross margin, and food customers spend an average S5 on sandwiches and salads with a 50 percent gross margin. In both cases, gross margin is simply price minus input cost and does not reflect variable labor and related expenses. Customer traffic throughout the day is as follows: Hour of day Beverage Custon Food Custom Profit Contribution 6:00 10s 827 68 8:00 9:00 10:00 11:00 S0 827.5 077.5 13:00 14:00 15:00 16:00 427 382.5 365 347 19:00 20:00 21:00 Totals 187 045 8612.S . Assume labor, electricity, and other incremental costs are $175 per hour of operation; calculate the profit maximizing hours of operation per day ii Assume the store is open 365 days per year, and that incremental rental costs are $2 million per year. Calculate optimal incremental profits. Should Starbucks close this site?

Explanation / Answer

A. Incremental profit is the profit gain or loss associated with a given managerial decision. Total profit increases so long as incremental profit is positive. When incremental profit is negative, total profit declines. Similarly, incremental profit is positive (and total profit increases) if the incremental revenue associated with a decision exceeds the incremental cost. Because incremental costs are $175 per hour, the optimal hours of operation for this Chicago O’Hare Starbucks outlet are from 6:00-19:00 hours per day (or from 6:00 am to 7:00 pm). Up until 7:00 pm, incremental revenues per hour exceed incremental costs and incremental profits are positive. After 7:00 pm, incremental revenues per hour fall short of incremental costs and incremental profits are negative.

B. Because the optimal hours of operation for this Chicago O’Hare Starbucks outlet are from 6:00-19:00 hours per day (or from 6:00 am to 7:00 pm), the calculation of optimal incremental profits is based on the following data:

Hour of day

Beverage Customers

Food Customers

Gross Margin

Incremental Costs/hour

Incremental Profits/hour