Sally invested in a chain of dry cleaners. She has decided that if she buys a ne
ID: 2486960 • Letter: S
Question
Sally invested in a chain of dry cleaners. She has decided that if she buys a new clothes press, she would be able increase her profits. The new equipment costs 15,400 to buy and set up. It can press 35 units an hour or 280 a day. She calculates that it will cost $.25 a piece to clean and press. She charges $1.10 a piece for customers.
a) How many pieces of clothing will be needed for Sally to break even on the new equipment?
b) Sally on average has demand of 200 pieces a day. How many days will it take to breakeven?
c) If Sally drops her price to $.99 a piece, she expects average demand of 250 pieces a day. How long will it take to breakeven at the reduced price? Should Sally drop her prices and buy the new equipment?
The college food services prep unit makes flatbread pizzas for a cost of $.50 a serving. It costs the Prep Services $210.00 a day for kitchen use and prep staff. The Italian sandwich shop in the area will deliver flatbreads for $10.00 each. The food prep staff cuts the flatbread into 6 servings. Eliminating the need for cooking reduces prep costs to $105.00 per day. At what level of demand should the food services department make flatbreads?
Explanation / Answer
Solution:
Cost of machine = $15,400
Cleaning cost = $0.25
Price charged from customers = $1.10
Profit per unit = $0.85
At break even point on the new equipment,
Fixed Cost =Variable cost
$15,400 = 0.25 * Number of units sold at break even
Hence the number of units sold at break even are:
$15,400/0.25 = 61,600 pieces of cloth will be needed by sally to break even on the new equipment.
(2) Demand per day = 280 clothes
No. of days required to break even = 61,600/ 200 = 308days
(3) New price = $0.99
Profit on revised price = $0.74
Order per day = 250
No. of days required to attain break even = 61,600 / 250 clothes = 247days
Since the break even will be attained early in the revised price option Sally should purchase the machine and rreduce the prices.
(b) Cost per serving = $0.50
Cost of prep service per day = $210
Cost of 1 loaf of flat bread = $10
Hence cost per serving = $10/6 = $1.67
Reduced prep costs = $210 - $105 = $105
The level of demand per day for the food services demand to take orders can be calculated as under:
Fixed cost = variable cost
$105 = $1.67 * No. of servings
Hence no. of servings to attain break even = 62.87
No. of servings to attain break even if flatbreads are prepared
$210 = $0.5 * No. of servings
Demand to attain break eve = 420 servings
If the demand is above 420 orders per day then only the food department should make flatbreads
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