MANAGERIAL SCIENCE

CASE ANALYSIS

MEC 24 - GROUP BRAVO

 CASE 1 The Clean Clothes Corner Laundry

When Molly Lai purchased the Clean Clothes Corner Laundry, she thought that because it
was in a good location near several high-income neighborhoods, she would automatically
generate good business if she improved the laundry’s physical appearance. Thus, she
initially invested a lot of her cash reserves in remodeling the exterior and interior of the
laundry. However, she just about broke even in the year following her acquisition of the
laundry, which she didn’t feel was a sufficient return, given how hard she had worked. Molly
didn’t realize that the dry-cleaning business is very competitive and that success is based
more on price and quality service, including quickness of service, than on the laundry’s
appearance.
In order to improve her service, Molly is considering purchasing new dry-cleaning
equipment, including a pressing machine that could substantially increase the speed at
which she can dry-clean clothes and improve their appearance. The new machinery costs
$16,200 installed and can clean 40 clothes items per hour (or 320 items per day). Molly
estimates her variable costs to be $0.25 per item dry-cleaned, which will not change if she
purchases the new equipment. Her current fixed costs are $1,700 per month. She charges
customers $1.10 per clothing item
 CASE 1 The Clean Clothes Corner Laundry

Observation
We observed that Molly's business, the Clean Clothes Corner Laundry, is a
very competitive business where the success of having this kind of
business is more on the price-quality service, including the quickness of
service, than on its appearance. To do these, Molly needs to improve her
service by purchasing dry equipment that will somehow help its business
grow faster and obtain customers.

Definition of the Problem

The Problem of Molly's dry-cleaning business is on how to weigh the cost
of buying new equipment and the possibilities of getting a new one that
will reflect the amount that she will get in return or its profit.
 The construction model is base on the
Brake-even point analysis that will
somehow determine its volume, cost, and
profit.
In general, the break-even volume can
be determined using the formula;

VCv = Total variable cost

Cv= variable cost per unit

Cf = Fixed Cost

Vp=Total Revenue

Z= Total profit

v = volume (number of units sold)

model of
construction
A. In computing, Molly’s Current Monthly

Volume are the following;

Cf = $ 1, 700 per month

Cv = $ 0.25 per item

In getting the current monthly
volume of Molly, we need to p= 1. 110
find used the break-even
volume, which is the Fixed cost \

of 1,700 per month divided by

the Selling price of $0.25 and
Variable cost per item of $1.10
we can come up with a total
monthly volume of $2,000.
 In computing the additional items B. If Molly purchases the new equipment, how
many additional items will she have to dry-clean
for a month we still need to each month to break even?
compute for the Fixed cost which
is dividing the 36 months with the Given:
new machinery $16,200 to get
New Machinery = $16,200
amount of 450.
Duration of 3 years (3 years * 12 months) = 36
Molly has an additional cost of 450 per months based on Problem C.
month by purchasing the new
equipment of $16,200. That will come
up to a Fixed cost of
$2,150($450+$1,700)
In computing for the additional items is
we used the break-even formula.
Then we deducted the total answer
which is $2,529.412 to $2,000 to get its
additional item which is $592.41. Since
we are only solving for the additional
items needed for the month.
 C. Molly estimates that with the new equipment
she can increase her volume to 4,300 items per
month. What monthly profit would she realize
with that level of business during the next 3
In solving the monthly Profit for the next years? After 3 years?
three years, we used the formula total
Profit equals total revenue minus total cost.
With the new equipment, she was able to
increase her volume to 4 300 items per
month multiply by the selling price, which
she can have a total of 4,730 as its Total
revenue.
As initially said, she also had a cost of 450
that will add to her 1,700 fixed Cost that will
total to 2,150 as her fixed cost.
The variable cost of 0.25 is multiplied by 4,
300 as a selling price of The total variable
cost of 1 075
 C. Molly estimates that with the new equipment
she can increase her volume to 4,300 items per
month. What monthly profit would she realize
with that level of business during the next 3
I·In solving the monthly Profit after 3 years, years? After 3 years?
we used the formula total Profit equals total
revenue minus total cost.
·With the new equipment, she was able to
increase her volume to 4 300 items per
month multiply by the selling price, which
she can have a total of 4,730 as its Total
revenue.
·As initially said, we only used the 1, 700 as
our fixed
·The variable cost of 0.25 is multiplied by 4,
300 as a selling price of The total variable
cost of 1, 075.
 D. Molly believes that if she doesn’t buy the new
equipment but lowers her price to $0.99 per item,
she will increase her business volume. If she
lowers her price, what will her new break-even
volume be? If her price reduction results in a
monthly volume of 3,800 items, what will her
monthly profit be?
We need to use the formula break-even Volume Given
formula to get the total items of Volume, where the Fixed Cost= 1, 700 per month
Fixed cost is $1 700 per month divide by the Selling Variable Cost = 0.25 per item
price of 0.99 minuses the variable cost of 0. 25, a
Selling price = 0. 99 new (lower)
total of $ 2 297 volume.

Variable Cost per Month(Price Reduction * Cost per Item) Price reduction monthly Volume = 3, 600
3,800 * 0.25 = $950 Items
Revenue per Month (Price Reduction * revenue per Item)
$3, 800 * 0.99 = 3, 762
 If she lowers her price, what will her new break-
even volume be? If her price reduction results in a
monthly volume of 3,800 items, what will her
monthly profit be?

The monthly profit will be based on the total

profit = total revenue - Total cost

On getting the variable cost per month, we

need to multiply price reduction to cost per
item to get the variable cost of $950.

In getting the revenue per month, we

multiply price reduction to cost per item to
get revenue per month of $ 3762.
 E. Molly estimates that if she purchases the
new equipment and lowers her price to
$0.99 per item, her volume will increase to
We will use trial and error to know the about 4,700units per month. Based on the
most significant volume Molly can local market, that is the largest volume she
realistically expect when purchasing can realistically expect. What should Molly
equipment and when not purchasing the do?
equipment.

Given: Fixed Cost = 1, 700 per month

Molly estimates that if she purchases the Variable Cost = $ 1, 175 (4, 700 * 0.25)
new equipment and lowers her price to Revenue = 4653 (4, 653 (4,700* 0.99)
$0.99 per item, her volume will increase
to about 4,700units per month. Based on
the local market, that is the most
significant volume she can realistically
expect is $ 1,328
Molly estimates that if she does not purchase the new equipment. that is the most
significant volume she can realistically expect is $ 1,778
 Implementation:

Based on Molly’s dry-cleaning business data, we concluded that buying new

equipment to better its business will rapidly increase her fixed cost,
resulting in a decrease in profit that she will gain. Even though she will use
these for three years, the probability is still low. So we suggest that Molly’s
Clean Clothes Corner Laundry should not buy new machinery equipment.
 CASE 2 The Ocobee River Rafting Company

Vicki Smith, Penny Miller, and Darryl Davis are students at State
University. In the summer they often go rafting with other students down
the Ocobee River in the nearby Blue Ridge Mountain foothills. The river
has a number of minor rapids but is not generally dangerous. The
students’ raf ts basically consist of large rubber tubes, sometimes joined
together with ski rope. They have noticed that a number of students who
come to the river don’t have rubber rafts and often ask to borrow theirs,
which can be very annoying. In discussing this nuisance, it occurred to
Vicki, Penny, and Darryl that the problem might provide an opportunity to
make some extra money. They considered starting a new enterprise, the
Ocobee River Rafting Company, to sell rubber rafts at the river.
 CASE 2 The Ocobee River Rafting Company

They determined that their initial investment would be about $3,000 to rent a
small parcel of land next to the river on which to make and sell the rafts; to
purchase a tent to operate out of; and to buy some small equipment such as air
pumps and a rope cutter. They estimated that the labor and material cost per
raft will be about $12, including the purchase and shipping costs for the rubber
tubes and rope. They plan to sell the rafts for $20 apiece, which they think is
about the maximum price students will pay for a preassembled raft. The
Ocobee River Rafting Company Soon after they determined these cost
estimates, the newly formed company learned about another rafting company
in North Carolina that was doing essentially what they planned to do. Vicki got
in touch with one of the operators of that company, and he told her the
company would be willing to supply rafts to the Ocobee River Rafting
Company for an initial fixed fee of $9,000 plus $8 per raft, including shipping.
(The Ocobee River Rafting Company would still have to rent the parcel of
riverside land and tent for $1,000.)
 CASE 2 The Ocobee River Rafting Company

The rafts would already be inflated and assembled. This alternative appealed
to Vicki, Penny, and Darryl because it would reduce the amount of time they
would have to work pumping up the tube sand putting the rafts together, and
it would increase time for their schoolwork. Although the students prefer the
alternative of purchasing the rafts from the North Carolina company, they are
concerned about the large initial cost and worried about whether they will lose
money. Of course, Vicki, Penny, and Darryl realize that their profit, if any, will be
determined by how many rafts they sell. As such, they believe that they first
need to determine how many rafts they must sell with each alternative in
order to make a profit and which alternative would be best given different
levels of demand. Furthermore, Penny has conducted a brief sample survey of
people at the river and estimates that demand for rafts for the summer will be
around 1,000 rafts.
COMPUTATIONS:
Alternative 1 Alternative 2

ct = $ 3,000 ct = $ 10,000
p = $ 20 p = $ 20
cv = $ 12 cv = $ 8
v1 = cf
p – cv v1 = cf
p – cv
= 3,000
20 – 12 = 10,000
20 – 8
= 375 rafts
= 833.33 or 833 rafts
 EXPLANATION/ANALYSIS

· If the demand is less than 375 rafts, the three State University students should
not venture into a river rafting business.
· If the demand is less than 833 rafts, alternative 2 should not be selected, and
alternative 1 should be utilized if demand is expected to be between 375 and 833
rafts.
· If the demand is greater than 833 rafts, which alternative is best? To determine
the answer, equate the two cost functions.
3,000 + 12v =10,000 + 8v
4v = 7,000
v = 1,750
· The 1,750 is referred to as the point of indifference between the two
alternatives. Generally, for demand lower than this point, the alternative with the
lowest variable cost should be selected. (This general relationship can be observed
by graphing the two cost equations and seeing where they intersect.)
 RECOMMENDATION

Thus, in order for Ocobee River Rafting Company to decide

which alternative they will select, we recommend the
following guidelines should be considered:

Demand < 375 rafts do not start the business

375 rafts < demand < 1,750 select Alternative 1
Demand > 1,750 select Alternative 2
 CONCLUSION

Since Penny Miller conducted a brief sample survey and

based on the results, she came into an estimation that the
demand will be approximately 1,000 rafts. Therefore,
ALTERNATIVE 1 should be selected.

By choosing ALTERNATIVE 1, the Ocobee River Rafting

Company will generate a profit of $ 5,000.

Z = vp – cf – vcv
= (1,000)(20) – 3,000 – (1,000)(12)
= $ 5,000
Case 3: Construction on a Downtown parking lot in Draper

The town of Draper, with a population of 20,000, sits adjacent to State University,
which has an enrollment of 27,000 students. Downtown Draper merchants have long
complained about the lack of parking available to their customers. This is one primary
reason for the steady migration of downtown businesses to a mall several miles
outside town. The local chamber of commerce has finally convinced the town council
to consider the construction of a new multi-level indoor parking facility downtown.
Kelly Mattingly, the town's public works director, has developed plans for a facility that
would cost $4.5 million to construct. To pay for the project, the town would sell
municipal bonds with a duration of 30 years at 8% interest. Kelly also estimated that
five employees would be required to operate the lot on a daily basis, at a total annual
cost of $140,000. It is estimated that each car that enters the lot would park for an
average of 2.5 hours and pay an average fee of $3.20. Further, it is estimated that each
car that parks in the lot would (on average) cost the town $0.60 in annual
maintenance for cleaning and repairs to the facility. Most of the downtown businesses
(which include a number of restaurants) are open 7 days per week.
 Observation & Definition of the Problem

We observed that Downtown Draper merchants have long complained about the lack
of available parking slots for its customers which led to the steady migration of
downtown businesses to a mall several miles outside of town. With the situation of
Downtown Draper, the local chamber of commerce was able to convince the town
council on considering the project of a new multi-level indoor parking facility to
accommodate the customers of Downtown Draper headed by the public work
director, Kelly Mattingly.

The problem of Kelly Mattingly is to determine the number of cars on a daily and
annual basis given the size of the town and the college population for it to pay off the
said project of a 30-year time frame.
 Model of Construction

The construction model is based on the Break-even point analysis that will somehow
determine its volume, cost, and profit.

In general, the break-even volume can be determined using the formula;

VCv = Total variable cost Z= Total profit

Cv= variable cost per unit
Cf = Fixed Cost v = volume (number of units sold)
Vp=Total Revenue
 Model Solution:

A. In computing the number of cars to park in the annual

basis are the following:

In general, the break-even volume can be determined using the formula;

Given:
Investment = $ 4,700,000 Duration = 30 years
Annual Cost = $ 140,000 Variable Cost = $ 0.60
Interest= 8% Selling Price = $ 3.20
 B. In computing the approximate number of cars that

would have to park on a daily basis are the following:

Implementation:
Based on Kelly’s data and our solutions, we concluded that the numbers determined
above are reasonable and can be achieved with given population of the town of
Draper.
Thank you for
listening!
PRESENTED BY:
SAMSON, ALYZZA MARIE
GASATAN, WILYN MAE
CABE, RALPH
BAQUITA, PRINCESS
ABAYABAY, ANGELICA