Julies Cleaning Services is considering expanding its domestic cleaning operations to include the provision of carpet cleaning. This will require the purchase of 20 specialised carpet cleaning machines, at a cost of 400 each, to be used by the team of cleaners. The company will treat this expenditure as a fixed cost.

This is a large additional cost for the business, but Julie expects that the demand for this service is sufficient to warrant charging a fee of 75 per room carpet. The variable costs incurred per clean are 21 which include all labour and materials costs.

Required:

a) Calculate the number of carpet cleans that Julies Cleaning Services needs to carry out to avoid losing money on the new carpet cleaning activity.

(4 marks)

b) The breakeven calculation carried out in part (a) required a number of assumptions to be made regarding the carpet cleaning business proposal. Discuss THREE (3) of the following assumptions, providing examples of where they may be valid, and where they may not be valid, in the situation facing Julies Cleaning Services.

Fixed costs remain constant regardless of activity level

Variable costs vary proportionately with activity

Total costs and total revenue are linear functions of output

There is no uncertainty

(maximum word count 300 words)

(15 marks)

c) Julie is considering refining the pricing model for the carpet cleaning to allow for different sized room carpets (lower prices for smaller rooms). Describe, using a numerical example, how the calculations in part (a) will be amended to allow for this pricing model. (maximum word count 120 words)

(6 marks)

TOTAL 25 MARKS

Question 4

Fancy Flowers Ltd is considering how many bouquets of flowers it will need at its stall at a local arts festival that is running for a few weeks. Due to supplier issues, it must choose in advance whether to prepare 200, 300 or 400 bouquets per day. Demand for bouquets can be 200, 300 or 400 per day at the festival. Any flowers not sold on the day will have to be thrown away.

The price charged per bouquet is 20, and the variable cost is 8 per bouquet. If the demand for bouquets exceeds the number of bouquets taken to the festival, then customers will have to be turned away. Fancy Flowers Ltd estimates that if this situation arises, it would cost the company 200 in loss of goodwill, irrespective of the number of customers turned away (i.e. the loss would be 200 if 100 customers were disappointed or if 300 were disappointed).

Required:

a) Prepare a pay-off table showing the profits for Fancy Flowers Ltd at all combinations of the number of bouquets prepared and demanded in each day.

(4 marks)

b) Showing clearly your method and calculations, recommend the number of bouquets that should be prepared in advance using the following decision-making criteria:

(i) Maximax

(ii) Maximin

(iii) Minimax regret

(14 marks)

c)

(i) Identify the additional information that would be required to calculate the expected demand for bouquets that Fancy Flowers Ltd may face each day, and describe how this calculation would be done.

(ii) Discuss TWO (2) benefits of the use of the expected value technique as a decision-making basis in the situation facing Fancy Flowers Ltd.

(maximum word count 140 words)