Max Power, the head of Human Resources at a major retailer, is wondering how much he should be spending on employee training. Max believes that there is room to improve employee skills, but he is having a hard time convincing management to spend hard cash on this intangible item. At current levels, employee skill scores have remained steady at 86 points on a 100-point scale.
Max believes that increasing the spending by $200 per employee per year would increase employee skills by an average of 1 point on the firm's rating scale (e.g., spending $400 per employee per year would increase skill scores from 86 to 88). Once skill levels reach 90, however, spending an additional $200 per employee per year only contributes to a ½ point increase in skill scores.
Max knows that skilled employees have a dramatic effect on customer satisfaction. Each point increase in skill scores leads to a 2-point increase in customer satisfaction, up to a score of 94 points (on a 100-point scale) and a 1-point increase thereafter. The latest survey shows a customer satisfaction score of 92.
Satisfied customers, in turn, lead to greater sales. Each point increase in customer satisfaction leads to a 0.75% increase in firm-wide revenues, up to a customer satisfaction score of 96, and a 0.25% increase in revenues thereafter.. Currently, each employee generates $100,000 in revenue, with an average contribution margin ratio of 40%.
Required:
How much should Max spend per employee on employee training? What is the expected increase in profit per employee?