Question:

A. 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 (i) closing time of 4 am and then (ii) your recommended closing time if it differs from 4 am.

C. 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.]

"Zoe, as you know, the Gould state legislature passed legislation last year allowing alcoholic Center to be sold in retail establishments until 4:00 a.m. We don't have to close our shop by 10 p.m. as required by the previous law. However, I am wondering if it is economical for us to open until 4:00 a.m. How many additional customers would we get by extending our hours? Would doing so increase our profits? I would like you to look into this issue for our downtown location and give me your recommendation." Kevin Blake, General Manager of Downtown Barrel, spoke these words to Zoe Hannah, his Operations Manager. Downtown Barrel is a major beverage retailer. It owns several wine and spirit stores that are part of its alcoholic Center division. Downtown Barrel is part of this chain of stores owned by the parent company. It is located in the downtown area, and while it has been reasonably profitable in the past, its financial performance has been declining in recent years. A store manager, an assistant manager, and two sales and inventory clerks run the store. The division provides general business and administrative support to each store. These services include purchasing, bookkeeping, economic analysis, and legal advice. To respond to Kevin Blake's request, Zoe Hannah asked her accountant, Tami Wong, to provide her with some data on the revenue and costs for the store. Specifically, she wanted to know the average purchase per customer and the cost of extending the store hours. Tami decided to sample a small set of customer invoices to see what they purchased. She selected two random samples of 30 customers each and analyzed what they had bought and the cost of the items that they had purchased. One sample represented "day customers" (those who purchased before 6:00 p.m.) and the other was for "evening customers" (those who purchased after 6:00 p.m.). Attachment 1 provides this data. During the data presentation, Tami remarked, "Zoe, there are two other things you should know about extending our hours. First, we will have to pay a 50% overtime bonus to our two night salespeople at the store for any hours after midnight. Second, we will have to invest in a better security system. I estimate that this will cost us approximately $28,000 in construction and rewiring cost. The improvements will have a life of seven years and we depreciate our assets using the straight-line method. The improvements are expected to have no salvage value." After looking at the data collected by Tami, Zoe Hannah decided to experiment with different closing times for the store. Because Zoe felt that the store closing was not simply a choice between two options 10:00 p.m. and 4:00 a.m. -- she asked the Downtown Barrel store manager to experiment for two weeks each with different closing times. She wanted to know how many customers came in during each hour of business for each closing time. She did this by progressively extending the closing time beyond 10:00 p.m. until 4:00 a.m. Attachment 2 summarizes the results of her experimentation with hours of operation. When all the data was collected, Zoe sent her analysis to Kevin. Her analysis is reproduced in Exhibit 1 below. Exhiblt 1 Zoe Hannah's Analysis of Store Hours Later that woek, Zoe and Kevin mat to diguds Zoe'w andyais. "Zoe", began Kevin, "I approciabe the work that you and Tami heve put into thit thatysis. Ooviously, you fwo hove collocted a lot of dati and thought this through carefily. However. 1 am unclear aboul a few things and I would apprecias it it you could clarly them for ine. Fist, I dont get this 'marginal appecach' I took economics in college, and 1 an TO: Kevia Biske, Ceneral Manager, Dowrtown Birel, Inc. emibarassed oo admit than t seaved a sigh of nolet and promptly forgol everything once the course was ower. I an eontused abeut how thew can be Bwo margial costa in thit shuation, one for liquar and the other for the sales clerks. Seoond. Tamrl sample supgests that evening austomers seem to parchace a higher amount. Why then de you ise the average purchase everal hours of operation? Thind, I wonder t some cusismers who artive turing the very iate hours might antive eartiar if the stowe closed earler. Can you lell bow your experimental data if thafs tree? And would that chasge rour noosmendason? I have now completed a study of the ecenomics of eutunding the store closing hours for Required: Downilow Barto, On the basis of my analysis, I necommend that we extend store hours to the statulory limit of 4:00am. each moming. This wil result in an incressed anhual profit of more Asiume that pou are Zoe Hancah and you hove been asked to exaborate on the memo in Exabi 1 to than $68,000 before taves. Even after the intial imestment of $28,000 to upgrade security. we addrest the asees raibed by Kievin blake in bot of his comeertatons w th you. Uwe the report form trom will stal have increased proft. I have reached this conclusion based on the following the course websice. information and analysis. This cabe reviews the folloaing toc conoept F Financial acoountng 4 and 5 managemert boosurting 2 - When we kept the sisre open urid 4.00 a.m. on an expermertal basi, me dscovered the store and is; microeconomics 6 and 7 ; and statatics 2 and 4. Got ah average of fiot cumbernen per hour even auring the last hour of business, from 3.00 to 4.00 a.m. The number of customers was a leate as large during each previous hour (Atachment 2 summartes the tewile of our experimeration weh bours of operation.) - Tamin sample of invoices shows that on average a typleal customer makes purchapes of aboul 137. (Wote al dollar toures in this memo are approaimate) Foom my experienoe numing the store, l can say that this number is oensiatort with everall hous of eperation ile., a Buying doeitiont - Cut of the 537, about 526 goes towad our purchase of the arcohol, which leaved ut with a oentibution morgit of $11.00 per cusheme. This fqure does not include he coat of keoping the swore oben for an additonal hour. Therefore. the contrbution margin of the adstonal untt bold duing the 3.00 to 400am. period is 511.005 customers =555.00. By beeping the store open for the addiconal hour thoen 3.00104.00am, we would increase our revenues by SS. 00. We must compare this bo the added oost of keeping the store open one more hour. The overhead cost of the additional hour is almost nothing (since the refrigerators musd be kept running overnighth anywayl. po the only subttantial cost added is the wage of the clerks. Dy Gould state iow, we must pay workers time-and-bhat, so our $15 hour clerks must be paid si2. 60 esch. The added cost of $45 is less than the added reverue of $55,90, and, therefore. staying opet until the last hour would inerease cur prefits. The same is Irue for ald previons hours as well. (These calculations are summarized in Atachment 3.) Comparing cumect profias with expected profits under my proposal, we will experierce a proft increase of $189 per day. or $68,040 per yeer, before taxes. These foures are approximate. of course. because there are seasohal changes in alcohol purchsses. and my estimates are based on experimentusion during the last six menths cnly. This mary sam an unusual agproach for maximixing our profi. But fim prety sure irs comect. In my economics ciatses at Gould Stase, I learned that prote increases whenever marginal revenue excetds marpinal cest. The marginal revenue is the asditional revenue frem doing one mere of temething fin this case, ane more hour of businessh and the marginal cost is the Attachment 1 Attachment 2 Purchases and Purchase Costs for Randomly Selected Customers Customers per Hour During Experimental Period Tari randomly selectod 69 customen involices - 30 fom dey custsmerh, and 30 from evening cuntomers. mase a purchase of 536.14 , and the aloohol purchused cout 326.58 io sasck:) Gon topin to 4 a am. Each dosing time was tesiled for teo woels. The tatle betiow shows the awerope Aur colowing thewe was 10pm. The iast celume on the right (4 am dosing tima) was wasd to find "eusumen per hour for the latie in heachmen 3 Attachment 3 Marginal Revenue and Marginal Cost Analysis 1 The marginal revenue (MR) for the hour is the contribution margin per customer ($11.00) multiplied by the number of customers. Note that if the marginal revenue is calculated in this way, it already takes into account the alcohol cost. 2 The marginal cost (MC) for the hour is the wages for two clerks: $15 per hour before midnight, and $22.50 per hour after midnight. 3 There are 360 days in one business year. "Zoe, as you know, the Gould state legislature passed legislation last year allowing alcoholic Center to be sold in retail establishments until 4:00 a.m. We don't have to close our shop by 10 p.m. as required by the previous law. However, I am wondering if it is economical for us to open until 4:00 a.m. How many additional customers would we get by extending our hours? Would doing so increase our profits? I would like you to look into this issue for our downtown location and give me your recommendation." Kevin Blake, General Manager of Downtown Barrel, spoke these words to Zoe Hannah, his Operations Manager. Downtown Barrel is a major beverage retailer. It owns several wine and spirit stores that are part of its alcoholic Center division. Downtown Barrel is part of this chain of stores owned by the parent company. It is located in the downtown area, and while it has been reasonably profitable in the past, its financial performance has been declining in recent years. A store manager, an assistant manager, and two sales and inventory clerks run the store. The division provides general business and administrative support to each store. These services include purchasing, bookkeeping, economic analysis, and legal advice. To respond to Kevin Blake's request, Zoe Hannah asked her accountant, Tami Wong, to provide her with some data on the revenue and costs for the store. Specifically, she wanted to know the average purchase per customer and the cost of extending the store hours. Tami decided to sample a small set of customer invoices to see what they purchased. She selected two random samples of 30 customers each and analyzed what they had bought and the cost of the items that they had purchased. One sample represented "day customers" (those who purchased before 6:00 p.m.) and the other was for "evening customers" (those who purchased after 6:00 p.m.). Attachment 1 provides this data. During the data presentation, Tami remarked, "Zoe, there are two other things you should know about extending our hours. First, we will have to pay a 50% overtime bonus to our two night salespeople at the store for any hours after midnight. Second, we will have to invest in a better security system. I estimate that this will cost us approximately $28,000 in construction and rewiring cost. The improvements will have a life of seven years and we depreciate our assets using the straight-line method. The improvements are expected to have no salvage value." After looking at the data collected by Tami, Zoe Hannah decided to experiment with different closing times for the store. Because Zoe felt that the store closing was not simply a choice between two options 10:00 p.m. and 4:00 a.m. -- she asked the Downtown Barrel store manager to experiment for two weeks each with different closing times. She wanted to know how many customers came in during each hour of business for each closing time. She did this by progressively extending the closing time beyond 10:00 p.m. until 4:00 a.m. Attachment 2 summarizes the results of her experimentation with hours of operation. When all the data was collected, Zoe sent her analysis to Kevin. Her analysis is reproduced in Exhibit 1 below. Exhiblt 1 Zoe Hannah's Analysis of Store Hours Later that woek, Zoe and Kevin mat to diguds Zoe'w andyais. "Zoe", began Kevin, "I approciabe the work that you and Tami heve put into thit thatysis. Ooviously, you fwo hove collocted a lot of dati and thought this through carefily. However. 1 am unclear aboul a few things and I would apprecias it it you could clarly them for ine. Fist, I dont get this 'marginal appecach' I took economics in college, and 1 an TO: Kevia Biske, Ceneral Manager, Dowrtown Birel, Inc. emibarassed oo admit than t seaved a sigh of nolet and promptly forgol everything once the course was ower. I an eontused abeut how thew can be Bwo margial costa in thit shuation, one for liquar and the other for the sales clerks. Seoond. Tamrl sample supgests that evening austomers seem to parchace a higher amount. Why then de you ise the average purchase everal hours of operation? Thind, I wonder t some cusismers who artive turing the very iate hours might antive eartiar if the stowe closed earler. Can you lell bow your experimental data if thafs tree? And would that chasge rour noosmendason? I have now completed a study of the ecenomics of eutunding the store closing hours for Required: Downilow Barto, On the basis of my analysis, I necommend that we extend store hours to the statulory limit of 4:00am. each moming. This wil result in an incressed anhual profit of more Asiume that pou are Zoe Hancah and you hove been asked to exaborate on the memo in Exabi 1 to than $68,000 before taves. Even after the intial imestment of $28,000 to upgrade security. we addrest the asees raibed by Kievin blake in bot of his comeertatons w th you. Uwe the report form trom will stal have increased proft. I have reached this conclusion based on the following the course websice. information and analysis. This cabe reviews the folloaing toc conoept F Financial acoountng 4 and 5 managemert boosurting 2 - When we kept the sisre open urid 4.00 a.m. on an expermertal basi, me dscovered the store and is; microeconomics 6 and 7 ; and statatics 2 and 4. Got ah average of fiot cumbernen per hour even auring the last hour of business, from 3.00 to 4.00 a.m. The number of customers was a leate as large during each previous hour (Atachment 2 summartes the tewile of our experimeration weh bours of operation.) - Tamin sample of invoices shows that on average a typleal customer makes purchapes of aboul 137. (Wote al dollar toures in this memo are approaimate) Foom my experienoe numing the store, l can say that this number is oensiatort with everall hous of eperation ile., a Buying doeitiont - Cut of the 537, about 526 goes towad our purchase of the arcohol, which leaved ut with a oentibution morgit of $11.00 per cusheme. This fqure does not include he coat of keoping the swore oben for an additonal hour. Therefore. the contrbution margin of the adstonal untt bold duing the 3.00 to 400am. period is 511.005 customers =555.00. By beeping the store open for the addiconal hour thoen 3.00104.00am, we would increase our revenues by SS. 00. We must compare this bo the added oost of keeping the store open one more hour. The overhead cost of the additional hour is almost nothing (since the refrigerators musd be kept running overnighth anywayl. po the only subttantial cost added is the wage of the clerks. Dy Gould state iow, we must pay workers time-and-bhat, so our $15 hour clerks must be paid si2. 60 esch. The added cost of $45 is less than the added reverue of $55,90, and, therefore. staying opet until the last hour would inerease cur prefits. The same is Irue for ald previons hours as well. (These calculations are summarized in Atachment 3.) Comparing cumect profias with expected profits under my proposal, we will experierce a proft increase of $189 per day. or $68,040 per yeer, before taxes. These foures are approximate. of course. because there are seasohal changes in alcohol purchsses. and my estimates are based on experimentusion during the last six menths cnly. This mary sam an unusual agproach for maximixing our profi. But fim prety sure irs comect. In my economics ciatses at Gould Stase, I learned that prote increases whenever marginal revenue excetds marpinal cest. The marginal revenue is the asditional revenue frem doing one mere of temething fin this case, ane more hour of businessh and the marginal cost is the Attachment 1 Attachment 2 Purchases and Purchase Costs for Randomly Selected Customers Customers per Hour During Experimental Period Tari randomly selectod 69 customen involices - 30 fom dey custsmerh, and 30 from evening cuntomers. mase a purchase of 536.14 , and the aloohol purchused cout 326.58 io sasck:) Gon topin to 4 a am. Each dosing time was tesiled for teo woels. The tatle betiow shows the awerope Aur colowing thewe was 10pm. The iast celume on the right (4 am dosing tima) was wasd to find "eusumen per hour for the latie in heachmen 3 Attachment 3 Marginal Revenue and Marginal Cost Analysis 1 The marginal revenue (MR) for the hour is the contribution margin per customer ($11.00) multiplied by the number of customers. Note that if the marginal revenue is calculated in this way, it already takes into account the alcohol cost. 2 The marginal cost (MC) for the hour is the wages for two clerks: $15 per hour before midnight, and $22.50 per hour after midnight. 3 There are 360 days in one business year