Note this problem assumes a continuous stocking model

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Note : This problem assumes a continuous stocking model – that is, Vidya never runs out of any product. M INI C ASES 6.68 a. Cody faces excess demand for his services; accordingly, Cody needs to determine which group he is best off booking. To make this assessment, we compute the incremental revenues and costs associated with booking each group. We begin by calculating the increase in Cody’s business income : Trip Item Detail Upper Keys Lower Keys Fare Given $300 $500 Fuel and oil costs a 160miles $.30; 400miles $.30 $48 $120 Maintenance costs a 160miles $.15; 400miles $.15 $24 $60 Contribution margin $228 $320 a : Although the trip is only one way, Cody will incur round-trip costs for fuel, oil, and maintenance. Thus, the round-trip costs are relevant. Balakrishnan, Sivaramakrishnan, & Sprinkle – 2e FOR INSTRUCTOR USE ONLY 6-49
Notice that the cost of the bus, office operating expenses, and advertising costs are all fixed. These costs do not vary with respect to Cody’s decision and, thus, are not relevant. For a similar reason, the fixed cost associated with insurance also is excluded. Based on our calculations, Cody’s business income will increase by $320 if he books the trip to the Lower Keys and by $228 if he books the trip to the Upper Keys. Cody’s expected tip also is relevant to this decision . The expected tip for a trip to the Lower Keys = $500 .15 = $75, while his expected tip for a trip to the Upper Keys = $300 .15 = $45. Thus, Cody’s overall (business + personal) income will increase by: $320 + $75 = $395 if he books the trip to the Lower Keys , and $228 + $45 = $273 if he books the trip to the Upper Keys . In short, Cody’s overall income increases by $395 – $273 = $122 more by booking the trip to the Lower Keys versus booking the trip to the Upper Keys. Above and beyond the financial benefits, Cody would need to consider the additional hours it will take to the complete the trip to the Lower Keys. By booking the group going to the Lower Keys, it is likely that Cody will not return home until late at night. If Cody has plans for the evening (e.g., a family event), this could tip the scales in favor of booking the trip to the Upper Keys. Cody also likely will consider whether each group has used his services in the past and is likely to do so in the future (i.e., is the relationship ongoing or one time). b. This piece of information changes the problem in a relatively straightforward way – Cody will now earn a fare on the return trip from the Upper Keys but (as assumed in part [a]) not on the return trip from the Lower Keys. Additionally, Cody will earn a tip on the return trip from the Upper Keys. Thus, Cody will be able to put the excess supply on the return trip from the Upper Keys to profitable use. The revised calculations are presented below: Trip Item Detail Upper Keys Lower Keys Fare $300 2; $500 1 $600 $500 Tip $600 .15; $500 .15 $90 $75 Balakrishnan, Sivaramakrishnan, & Sprinkle – 2e FOR INSTRUCTOR USE ONLY 6-50
Fuel & oil costs 160miles $.30; 400miles $.30 ($48) ($120) Maintenance costs 160miles $.15; 400miles $.15 ($24) ($60) Increase in business + personal income $618 $395

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