Sean Bobek, the head of Human Resources at a major retailer, is wondering how much he should be spending on employee training. Sean 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.

Sean 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. Once skill levels reach 90, spending an additional $200 per employee per year only contributes to a ½ point increase in skill levels.

Sean knows that skilled employees have a dramatic effect on customer satisfaction. Each point increase in skill level 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. Sean estimates a 0.5% increase in firm wide sales for each percentage increase in customer satisfaction. The increase is 0.75% after scores of 95% in customer satisfaction. Currently, each employee generates $100,000 in gross sales, with an average contribution margin ratio of 35%.

Required:

How much should Sean spend on employee training?