VILLAGE HILL SPIRITS - QUESTIONS Assume that you are Grace Baker and you have been asked to elaborate on the memo in Exhibit 1 to address the issues raised by Jordan Wright in both of his conversations with you. Use the report form from the course website and please be certain to address all of the following issues: Q.1. What conditions would justify the assumption of a constant contribution margin per customer? Do you think those conditions are likely to hold here? To support your conclusions, do a scatter plot of the sample data, and then use the sample data to run a regression of purchase costs (dependent variable) on purchase revenues (independent variable). [Hint What is the meaning of the intercept term of your regression results?] Q.2 FRemoved from the assignment Q.3. Q.4, Q.5. a. Is Grace using marginal cost and marginal revenue correctly in her analysis? Explain the errors in her analysis, if any. [Hint: Think about Jordan Wright's questions.) What closing time should Village Hill Spirits choose to maximize profits? Calculate the Increase in profits (relative to the current closing time of 10 pm) that would result from extending store hours to 4 am. If you recommend a different closing time, calculate the Increase in profits (again relative to the current closing time) that would result from your recommendation Calculate the breakeven number of additional customers for each added hour of operation up to 4 am. b. Calculate the breakeven number of additional customers for an entire year, assuming closing time of 4 am and then your recommended closing time if it differs from 4 am. Find the safety margin on new customers for the year. [Hint: For the per-year analysis, remember to account for the cost of the security upgrade. Use straight-line depreciation as a measure of the fixed cost of the security upgrade, and then add the cost of overtime labor for the additional hours of business for each of the 360 business days in the year) C. Expert Q&A Done VILLAGE HILL SPIRITS Carto be sold in the Gas you know the Golden 40 Pored by the previous www.am 4:00 am Howard dong proda? I would like you to Jordan Wright General Manager of Village Sorteose words Open Mange Viagens a reale How para el Center in Viage Spriba la part the chanted by the company stocated in the downtown and while it has been my profile transportomance has been declining in recent years Astor manager at mange and to try the The provided peene bir dare upport to each These include ring booking.com analysis and legal advice To respond to Wire Graced here to om data on the revenue and costs for the store specially when the purchase per customer and the cost oftending the store hours. Jei to samples customer invoices to see what they purchased She selected we random samples of connect and analyzed what they had bought and the cost of the may tad pred represented day customers rose who purchased before 6.00pm) and the other was ning customers (one who purchase aerop) Atachment provides the During the data presentation et ce there were things you acting our house will have to pay 50% overtimento e store for any hours after midnight Second we will have to sina beter system hthis will cost approx 21000 in construction and wig cost. There wave of years and we depressing the method The speed to ensagem Aher looking at the data collected by Julie Grace decided to experiment water og for the store. Because Grace felt that the store doing any choice boom 10:00pm and 4:00 am - she asked the Village Hall Spirits store manager to experiment for me each with different closing times. She wanted to know how many customers came in during each houd business for each closing time Sedie this by progressively ending the long time bente pm 4:00 am Attachment 2 urmareste results of the experimentation with houden When all of the data was collected as they Jordan Horny Exhelow MEMORANDUM : Jordan Wright. General Manager Village Hill Spirits, Inc FROM Grace Baker, Operations Manager RE Excending store hours of operation for Village Hi Spirits DATE November 12, 2017 CC Aslie Lam I have now completed a study of the economics of extending the store closing hours for Village He Spirit. On the basis of my analysis, I recommend that we extend store hours to the statutory limit of 4:00 a.m. each moming. This will result in an increased annual profit of more than $40.000 before taxes. Even after the initial investment of S21.000 to upgrade security will have increased profit. I have reached this conclusion based on the following Information and analysis When we kept the store open uns 400 am onementale che got an average of five come per hour even during the last hour of bin 300 4:00 am. The number of customers was estas farge during each previous hout Attachment 2 summarizes the results of our experimentation with hours of perion) Julie sample of invoices shows that, on average, a typical customers purchase of about re buying decisions are not substantially different from an evening customer's buying decisione Out of the $34. about $25 goes toward our purchase of the wooho, which we contribution margin of Sper comeThis four does not cost og store open and tonal hou. Therefore, the combustion map of the additional no so during the 300 104:00a.m. period is $0.005 customers 55.00 By keeping the store open for the additional hour from 3:00 14:00 am, we would increase Our revenues by $45.00. We must compare this to the added cost of keeping the store open one more hour. The overhead cost of the additional hour is almost nothing since the Expert Q&A Done MEMORANDUM TO: Jordan Wright General Manager, Vilage Spirits, Inc FROM Grace Baker, Operations Manager RE: Extending store hours of operation for Village He Spirits DATE November 12, 2017 ce Julie Lam I have now completed a study of the economics of extending the store dating hours for Village Hal Spirits. On the basis of my analysis, I recommend that we extend store hours to the statutory limit of 4:00 a.m.cach morning. This will result in an increased annual proft of more than $40,000 before taxes. Even after the initial investment of 521.000 to upgrade security information and analysis will still have increased profit. I have reached this conclusion based on the following When we at the store open until 400 m. einen we de store pot an average of five customers per hour even during the last hour of bine. Son 300 4:00 am The rumber of customers was born och prova Attachment 2 summarizes the results of our experimentation with hours of operation) Jule sample of invoices shows that on average a typical customers of out 529 (Note: all dollar figures in this memo are apprown From my experiencing the store. I can say that this number is consistent veral hours of person day comes buying decisions are not substantially different from an evening outomersborg during the 200 to 4:00 am period is $9.00x5 customers 54.00 By keeping the store open for the additional hour from 3:00 to 4:00 am. we would increase our revenues by $45.00. We must compare this to the added cost of keeping the store open one more hour. The overhead cost of the additional hour is almost nothing juince the refrigerators must be kept running overnight anyway), so the only substantia costadoed is the wage of the dierka By Gould state line, we must pay workers time and has usehow cleris must be paid 521 each. The added cost of 542 less than the added revenue 845.00 and therefore, staying open until the last hou would increase our profil. The same true for at previous hours as well. (These calculations are summarized in tachment 3.) Comparing current profits with expected profits under my proposal we will experience a profit increase of $127 per day, or $45,720 per year before taxes. These figures approximate of course, because there are seasonal changes in alcohol purchases and my estimates are based on experimentation during the last six months only This may seem an unusual approach for maximizing our prodit, but I'm pretty sure Escort In my economics classes at Gould state learned to profit increases whenever aga A wonds marginal cost The marginal and is the additional from doing one more of something in this case, one more hour of business) and the marginal coste additional cost from doing one more of something again one more hour of business Later that week Grace and Jordan med to discuss Grace's analysis. Grace" began Jordan 1 apreciate the work that you and Julie have put into the analysis Obviously, you wo have collected all of and However, and appreciate you could clarify them for me. First, I don't get this marginal approach ook economcn colegant a embarrassed to admit that ved ath of olul and prompty forget everything on the course was over. I am confused about how w there can be two marginal con son one for and the other for the sales clerks. Second, Jules sample suggests that evening customers to purchase a higher amount. Why did you use the average purchase overall hours of operation that wonder if some customers who arrive during the very late hours might be earlier the store deed earlier. Can you tel trom your experimental data that's true? And would that change your recommendation Required Assume that you are Grace Baker and you have been asked to elaborate on the memo address the lowes raised by Jordan Wight in both of his conversations with you Use the report form from the course wete This case review the following LDC con Francial accounting and management accounting 2 and microeconomics and 7 and statistics 2 and 4 Expert Q&A Done Attachment 1 Purchases and Purchase Cost for Randomly selected Customers Julie randomly selected to customer invoices from day customers to wings. purchase revence and cost cuts we own below. For example today customer purchase of 532.50, and the cond purchased cost $23.00 ) DAY hurch 32.50 35.22 39.99 23.08 39.48 30.55 24.77 30.13 31.16 34.67 32.37 40.71 33 07 43.86 45.88 42.00 36.69 43:59 31.38 12.09 26.78 26.39 33.84 32.39 25.29 21.11 27.60 37.79 38 39 27.14 EVENING Purcha 23.89 40.29 25.90 34.66 30.40 35.87 16 53 36.40 28.32 30.95 20.17 336 18.49 3382 21.11 34.92 24.91 3515 25.75 32.9 25.03 36.30 29.61 38.45 23:31 32.49 29.51 34.91 36.39 52.78 29.83 3243 29 R$ 30.20 2851 37 23.55 2690 21.66 47.19 17.93 33.48 18:38 44.20 22.96 25.24 37.15 17.72 35.81 14.41 32.61 22.23 30.29 25.50 31.07 29,00 245 21.31 34.90 32.00 25.20 2401 28.50 24.95 22.42 25.89 23.07 25. 22.99 28.63 29.51 25.16 25 26 3700 28.01 19 6 26.54 19 19 34. 25.12 35.09 22.76 26.24 26.79 25.68 2051 23.27 19.50 28.02 Attachment 2 Customers per Hour During Experimental Period Over and overal month Village Songs from 10..tam Eccloning te wasted for two weeks The umber of congeach how of them from tolon shows the uterostomers for each hour of being our doing w10 pm Customers Per Hour if Closing Time is 10pm 11pm 12am lam sam 11-12noon 4 4 4 4 4 4 5 5 5 5 5 5 5 7 7 7 7 7 7 7 2-3pm 10 10 10 20 10 10 10 3-4pm 11 11 11 11 11 11 4-5pm 11 11 11 11 11 11 13 5-6pm 11 11 11 11 11 11 11 6-7pm 12 12 12 22 12 12 1 13 13 13 13 13 8-9pm 14 13 13 13 13 1 13 9-10pm 14 13 12 12 12 12 12 10-11pm 12 11 10 10 10 11-12mid. 10 9 8 8 8 12.1pm 1-2pm 7-8pm Expert Q&A Done 25.29 21.11 27.60 37.79 38.37 27.14 17.72 14 41 22.23 25.50 29.00 21.31 35.83 37.61 30.29 31.07 2435 34.90 26.79 25.6 2451 23 27 1950 Attachment 2 Customers per Hour During Experimental Period Over a period of the Viage He prestaties from top 104 am Each dosing time was tested for wens Theme waste Number of customers in each hour of botherings for the first com shows the umber of customers for each hour of business in the ut congue was 10 Customers Per Hour if Closing Time is: 10pm 11pm 12am lam Zam 11-12noon 4 4 4 4 4 12-1pm 5 5 5 5 S 5 S 1-2pm 7 7 7 7 7 7 7 2-3pm 10 10 10 10 30 10 10 3-4pm 11 11 31 11 11 4-5pm 11 11 11 11 5-6pm 11 1 11 11 11 11 11 12 12 12 12 12 22 12 7-8pm 13 13 13 13 13 13 13 8-9pm 14 13 13 13 13 13 9-10pm 14 13 12 12 12 22 12 10-11pm 12 11 11 10 10 10 11-12mid. 10 8 3 8 12-1am 8 7 6 6 1-2am 7 6 5 2-Jam 6 5 5 6-7 pm The one14 A Attachment Marginal Revenue and Marginal Cost Analysis Com 111 10 20 28 23120 HH . 28 . 123 . st 10 12 es 43 H 3 129 45.720 The Me The color rose was born bourer VILLAGE HILL SPIRITS - QUESTIONS Assume that you are Grace Baker and you have been asked to elaborate on the memo in Exhibit 1 to address the issues raised by Jordan Wright in both of his conversations with you. Use the report form from the course website and please be certain to address all of the following issues: Q.1. What conditions would justify the assumption of a constant contribution margin per customer? Do you think those conditions are likely to hold here? To support your conclusions, do a scatter plot of the sample data, and then use the sample data to run a regression of purchase costs (dependent variable) on purchase revenues (independent variable). [Hint What is the meaning of the intercept term of your regression results?] Q.2 FRemoved from the assignment Q.3. Q.4, Q.5. a. Is Grace using marginal cost and marginal revenue correctly in her analysis? Explain the errors in her analysis, if any. [Hint: Think about Jordan Wright's questions.) What closing time should Village Hill Spirits choose to maximize profits? Calculate the Increase in profits (relative to the current closing time of 10 pm) that would result from extending store hours to 4 am. If you recommend a different closing time, calculate the Increase in profits (again relative to the current closing time) that would result from your recommendation Calculate the breakeven number of additional customers for each added hour of operation up to 4 am. b. Calculate the breakeven number of additional customers for an entire year, assuming closing time of 4 am and then your recommended closing time if it differs from 4 am. Find the safety margin on new customers for the year. [Hint: For the per-year analysis, remember to account for the cost of the security upgrade. Use straight-line depreciation as a measure of the fixed cost of the security upgrade, and then add the cost of overtime labor for the additional hours of business for each of the 360 business days in the year) C. Expert Q&A Done VILLAGE HILL SPIRITS Carto be sold in the Gas you know the Golden 40 Pored by the previous www.am 4:00 am Howard dong proda? I would like you to Jordan Wright General Manager of Village Sorteose words Open Mange Viagens a reale How para el Center in Viage Spriba la part the chanted by the company stocated in the downtown and while it has been my profile transportomance has been declining in recent years Astor manager at mange and to try the The provided peene bir dare upport to each These include ring booking.com analysis and legal advice To respond to Wire Graced here to om data on the revenue and costs for the store specially when the purchase per customer and the cost oftending the store hours. Jei to samples customer invoices to see what they purchased She selected we random samples of connect and analyzed what they had bought and the cost of the may tad pred represented day customers rose who purchased before 6.00pm) and the other was ning customers (one who purchase aerop) Atachment provides the During the data presentation et ce there were things you acting our house will have to pay 50% overtimento e store for any hours after midnight Second we will have to sina beter system hthis will cost approx 21000 in construction and wig cost. There wave of years and we depressing the method The speed to ensagem Aher looking at the data collected by Julie Grace decided to experiment water og for the store. Because Grace felt that the store doing any choice boom 10:00pm and 4:00 am - she asked the Village Hall Spirits store manager to experiment for me each with different closing times. She wanted to know how many customers came in during each houd business for each closing time Sedie this by progressively ending the long time bente pm 4:00 am Attachment 2 urmareste results of the experimentation with houden When all of the data was collected as they Jordan Horny Exhelow MEMORANDUM : Jordan Wright. General Manager Village Hill Spirits, Inc FROM Grace Baker, Operations Manager RE Excending store hours of operation for Village Hi Spirits DATE November 12, 2017 CC Aslie Lam I have now completed a study of the economics of extending the store closing hours for Village He Spirit. On the basis of my analysis, I recommend that we extend store hours to the statutory limit of 4:00 a.m. each moming. This will result in an increased annual profit of more than $40.000 before taxes. Even after the initial investment of S21.000 to upgrade security will have increased profit. I have reached this conclusion based on the following Information and analysis When we kept the store open uns 400 am onementale che got an average of five come per hour even during the last hour of bin 300 4:00 am. The number of customers was estas farge during each previous hout Attachment 2 summarizes the results of our experimentation with hours of perion) Julie sample of invoices shows that, on average, a typical customers purchase of about re buying decisions are not substantially different from an evening customer's buying decisione Out of the $34. about $25 goes toward our purchase of the wooho, which we contribution margin of Sper comeThis four does not cost og store open and tonal hou. Therefore, the combustion map of the additional no so during the 300 104:00a.m. period is $0.005 customers 55.00 By keeping the store open for the additional hour from 3:00 14:00 am, we would increase Our revenues by $45.00. We must compare this to the added cost of keeping the store open one more hour. The overhead cost of the additional hour is almost nothing since the Expert Q&A Done MEMORANDUM TO: Jordan Wright General Manager, Vilage Spirits, Inc FROM Grace Baker, Operations Manager RE: Extending store hours of operation for Village He Spirits DATE November 12, 2017 ce Julie Lam I have now completed a study of the economics of extending the store dating hours for Village Hal Spirits. On the basis of my analysis, I recommend that we extend store hours to the statutory limit of 4:00 a.m.cach morning. This will result in an increased annual proft of more than $40,000 before taxes. Even after the initial investment of 521.000 to upgrade security information and analysis will still have increased profit. I have reached this conclusion based on the following When we at the store open until 400 m. einen we de store pot an average of five customers per hour even during the last hour of bine. Son 300 4:00 am The rumber of customers was born och prova Attachment 2 summarizes the results of our experimentation with hours of operation) Jule sample of invoices shows that on average a typical customers of out 529 (Note: all dollar figures in this memo are apprown From my experiencing the store. I can say that this number is consistent veral hours of person day comes buying decisions are not substantially different from an evening outomersborg during the 200 to 4:00 am period is $9.00x5 customers 54.00 By keeping the store open for the additional hour from 3:00 to 4:00 am. we would increase our revenues by $45.00. We must compare this to the added cost of keeping the store open one more hour. The overhead cost of the additional hour is almost nothing juince the refrigerators must be kept running overnight anyway), so the only substantia costadoed is the wage of the dierka By Gould state line, we must pay workers time and has usehow cleris must be paid 521 each. The added cost of 542 less than the added revenue 845.00 and therefore, staying open until the last hou would increase our profil. The same true for at previous hours as well. (These calculations are summarized in tachment 3.) Comparing current profits with expected profits under my proposal we will experience a profit increase of $127 per day, or $45,720 per year before taxes. These figures approximate of course, because there are seasonal changes in alcohol purchases and my estimates are based on experimentation during the last six months only This may seem an unusual approach for maximizing our prodit, but I'm pretty sure Escort In my economics classes at Gould state learned to profit increases whenever aga A wonds marginal cost The marginal and is the additional from doing one more of something in this case, one more hour of business) and the marginal coste additional cost from doing one more of something again one more hour of business Later that week Grace and Jordan med to discuss Grace's analysis. Grace" began Jordan 1 apreciate the work that you and Julie have put into the analysis Obviously, you wo have collected all of and However, and appreciate you could clarify them for me. First, I don't get this marginal approach ook economcn colegant a embarrassed to admit that ved ath of olul and prompty forget everything on the course was over. I am confused about how w there can be two marginal con son one for and the other for the sales clerks. Second, Jules sample suggests that evening customers to purchase a higher amount. Why did you use the average purchase overall hours of operation that wonder if some customers who arrive during the very late hours might be earlier the store deed earlier. Can you tel trom your experimental data that's true? And would that change your recommendation Required Assume that you are Grace Baker and you have been asked to elaborate on the memo address the lowes raised by Jordan Wight in both of his conversations with you Use the report form from the course wete This case review the following LDC con Francial accounting and management accounting 2 and microeconomics and 7 and statistics 2 and 4 Expert Q&A Done Attachment 1 Purchases and Purchase Cost for Randomly selected Customers Julie randomly selected to customer invoices from day customers to wings. purchase revence and cost cuts we own below. For example today customer purchase of 532.50, and the cond purchased cost $23.00 ) DAY hurch 32.50 35.22 39.99 23.08 39.48 30.55 24.77 30.13 31.16 34.67 32.37 40.71 33 07 43.86 45.88 42.00 36.69 43:59 31.38 12.09 26.78 26.39 33.84 32.39 25.29 21.11 27.60 37.79 38 39 27.14 EVENING Purcha 23.89 40.29 25.90 34.66 30.40 35.87 16 53 36.40 28.32 30.95 20.17 336 18.49 3382 21.11 34.92 24.91 3515 25.75 32.9 25.03 36.30 29.61 38.45 23:31 32.49 29.51 34.91 36.39 52.78 29.83 3243 29 R$ 30.20 2851 37 23.55 2690 21.66 47.19 17.93 33.48 18:38 44.20 22.96 25.24 37.15 17.72 35.81 14.41 32.61 22.23 30.29 25.50 31.07 29,00 245 21.31 34.90 32.00 25.20 2401 28.50 24.95 22.42 25.89 23.07 25. 22.99 28.63 29.51 25.16 25 26 3700 28.01 19 6 26.54 19 19 34. 25.12 35.09 22.76 26.24 26.79 25.68 2051 23.27 19.50 28.02 Attachment 2 Customers per Hour During Experimental Period Over and overal month Village Songs from 10..tam Eccloning te wasted for two weeks The umber of congeach how of them from tolon shows the uterostomers for each hour of being our doing w10 pm Customers Per Hour if Closing Time is 10pm 11pm 12am lam sam 11-12noon 4 4 4 4 4 4 5 5 5 5 5 5 5 7 7 7 7 7 7 7 2-3pm 10 10 10 20 10 10 10 3-4pm 11 11 11 11 11 11 4-5pm 11 11 11 11 11 11 13 5-6pm 11 11 11 11 11 11 11 6-7pm 12 12 12 22 12 12 1 13 13 13 13 13 8-9pm 14 13 13 13 13 1 13 9-10pm 14 13 12 12 12 12 12 10-11pm 12 11 10 10 10 11-12mid. 10 9 8 8 8 12.1pm 1-2pm 7-8pm Expert Q&A Done 25.29 21.11 27.60 37.79 38.37 27.14 17.72 14 41 22.23 25.50 29.00 21.31 35.83 37.61 30.29 31.07 2435 34.90 26.79 25.6 2451 23 27 1950 Attachment 2 Customers per Hour During Experimental Period Over a period of the Viage He prestaties from top 104 am Each dosing time was tested for wens Theme waste Number of customers in each hour of botherings for the first com shows the umber of customers for each hour of business in the ut congue was 10 Customers Per Hour if Closing Time is: 10pm 11pm 12am lam Zam 11-12noon 4 4 4 4 4 12-1pm 5 5 5 5 S 5 S 1-2pm 7 7 7 7 7 7 7 2-3pm 10 10 10 10 30 10 10 3-4pm 11 11 31 11 11 4-5pm 11 11 11 11 5-6pm 11 1 11 11 11 11 11 12 12 12 12 12 22 12 7-8pm 13 13 13 13 13 13 13 8-9pm 14 13 13 13 13 13 9-10pm 14 13 12 12 12 22 12 10-11pm 12 11 11 10 10 10 11-12mid. 10 8 3 8 12-1am 8 7 6 6 1-2am 7 6 5 2-Jam 6 5 5 6-7 pm The one14 A Attachment Marginal Revenue and Marginal Cost Analysis Com 111 10 20 28 23120 HH . 28 . 123 . st 10 12 es 43 H 3 129 45.720 The Me The color rose was born bourer
