1. Susan Meyer, owner/manager of Meyer’s Motor Court in Key West, is considering outsourcing the daily room cleanup for
her motel to Duffy’s Maid Service. Susan rents an average of 50 rooms for each of 365 nights (365 × 50 equals the total rooms rented for the year). Susan’s cost to clean a room is $12.50. The Duffy’s Maid Service quote is $18.50 per room plus a fixed cost of $25,000 for sundry items such as uniforms with the motel’s name. Susan’s annual fixed cost for space, equipment, and supplies is $61,000. Which is the preferred process for Susan, and why?
2. A plant has an effective capacity of 900 units per day and produces 800 units per day with its product mix; what is its efficiency?
3. A work center containing 4 machines of equal capability operates 2 shifts per day 5 days per week (8 hours per shift). This
is the effective capacity. If the work center has a system efficiency of 95%, what is the expected output in hours per week?
4. Janelle Heinke, the owner of Ha’Peppas!, is considering a new oven in which to bake the firm’s signature dish, vegetarian
pizza. Oven type A can handle 20 pizzas an hour. The fixed costs associated with oven A are $20,000 and the variable costs are $2.00 per pizza. Oven B is larger and can handle 40 pizzas an hour. The fixed costs associated with oven B are $30,000 and the variable costs are $1.25 per pizza. The pizzas sell for $14 each.
a) What is the break-even point for each oven?
b) If the owner expects to sell 9,000 pizzas, which oven should she purchase?
c) If the owner expects to sell 12,000 pizzas, which oven should she purchase?
d) At what volume should Janelle switch ovens?
5. Dr. Aleda Roth, a prolific author, is considering starting her own publishing company. She will call it DSI Publishing, Inc.
DSI’s estimated costs are:
Variable cost per book $20.00
Selling price per book $30.00
How many books must DSI sell to break even? What is its break even point in dollars?
6. James Lawson’s Bed and Breakfast, in a small historic Mississippi town, must decide how to subdivide (remodel) the
large old home that will become its inn. There are three alternatives:
Option A would modernize all baths and combine rooms, leaving the inn with four suites, each suitable for two to four adults.
Option B would modernize only the second floor; the results would be six suites, four for two to four adults, two for two adults only.
Option C (the status quo option) leaves all walls intact. In this case, there are eight rooms available, but only two are suitable for four adults, and four rooms will not have private baths.
Below are the details of profit and demand patterns that will accompany each option:
Annual Profit under Various Demand Patterns
Alternatives High p Average p
A (modernize all) $90,000 .5 $25,000 .5
B (modernize 2nd) $80,000 .4 $70,000 .6
C (status quo) $60,000 .3 $55,000 .7
a) Draw the decision tree for Lawson.
b) Which option has the highest expected value?