PRACTICE PROBLEMS: WORKSHOP I CASE MODEL

1. St. Elena Winery sells 100,000 gallons of wine a year. It sells 10% of its wine in barrels, 60% in jugs, and 30%
in 1-liter bottles. Its base selling price is $2/gallon in barrels. The selling price for wine in jugs is 25% higher
than in barrels; for wine in bottles, it’s 40% higher.

2. The marketing experts at Albright Home Products have just completed a marketing survey for a new
product. The survey shows with reasonable certainty that the number of units that can be sold varies with
the selling price as follow:

Selling price, $ / unit 6.50 7.00 7.50 8.00 8.50 9.00

The production staff at Albright has estimated the costs of production as follow: a total of $30,000 for
equipment, overhead, and other fixed costs and a total of $4/unit for labor, materials, and all other variables
costs.
a) What are the break-even points at the different selling price? Show the results in both tabular and graph
(chart) formats.
b) How much profit can the company expect to make at the expected sales levels at each of the selling
process? Show the results in both tabular and graph (chart) formats.
c) Which of the selling prices should the company select, and why?
d) How sensitive is profit to selling price? Respond by estimating the range of selling prices for which the
profit does not vary more than 5% from that for the selling price identified in part ( c )

3. The total market for a certain type of product made by Benton Products is estimated to be 150,000 units.
Benton’s marketing department estimates that its share of the product’s market will depend on its selling
price in the following manner:

Selling price, $ / unit 5.00 6.00 7.00 8.00 9.00 10.00

Benton estimates its fixed cost for production at $100,000 and its variable cost of production at $2.50/ unit.
a) What are the break-even points at the different selling prices? Show the results in both tabular and
graph (chart) formats.
b) How much profit can the company expect to make at the expected sales levels at each of the selling
prices? Show the result in both tabular and graph (chart) formats.
c) Which of the selling prices should the company select and why?

4. Factory workers at a company are paid of wage of $15/hour. In addition, the company pays benefits
(Vacation and sick leave, health insurance, etc.) equal to 75% of a worker’s base wage for a 40-hour
workweek. Workers are paid time-and-a-half for any hours worked in excess of 40 hours during a week,
however, the company does not pay benefits for any overtime worked.
a) How much would a worker receive in wages for working 40, 42, 44, 46, 48 & 50 hours during a week?
What would be the worker’s average hourly pay?
b) What would the company’s cost be for a worker who worked 40, 42, 44, 46, 48 & 50 hours during a
week? What would be the company’s average hourly cost?

5. The fixed cost for a product made by Grant Devices is $125,000 and the variable cost is $5.00/ unit.
Marketing specialist at Grant Devices estimate potential sales at 50,000 units for a selling price of $10.00/
unit. They also estimate that for every reduction of $0.50 in selling price, Grant cam sell an additional 15% of
the number at the higher price; that is, if their selling price dropped to $9.50. Grant could sell 57,500 units
(50,000 x 1.15), and if the price dropped to $9.00, they could sell 66,125 units (57,500 x 1.15)
 a) What are the break-even points at the different selling prices? Show the results in both tabular and
graph (chart) formats.
b) How much profit can the company expect to make at the expected sales levels at each of the selling
prices? Show the results in both tabular and graph (chart) formats.
c) Which of the selling prices should the company select and why?

6. The City Manager of Suburbia is evaluating various levels of expenditures for police protection. She has
found that the average response time (in minutes) to emergency calls is inversely related to the annual
budget for Suburbia’s police department. The relationship is: R = 50
C

Where R = average response time in minutes and C = annual police budget in millions of dollars
Each citizen of Suburbia evaluates the benefit of an emergency police response as follows:
B = $100 - $10R

Where B = benefit in dollars. Thus, a response time of 10 minutes produces zero benefit and a longer time
produces a negative benefit.

There are 500,000 emergency calls annually in Suburbia.

1) Develop a spreadsheet model for this problem, assuming the performance measure is total benefit
minus total cost. Evaluate alternative police budgets of $5 million, $10 million, $15 million and $20
million. Which of these is preferred?
2) Now suppose the criterion is the ratio of total benefit divided by total cost. For the same possible
budget, which is more preferred?

7. An executive is in the process of deciding on the price for a new product. His goal is to maximize profit. The
alternatives are different possible prices from $2 per unit to $10 per unit. The model to be used is described
below:

Let: x = number of units produced (and sold)

Cost relationship: C(x) = 800 + 1.25x

a) Find an approximate solution to the model by trial and error (i.e. try several values of price between $2
and $10 in increments of $1, and try to find a price that gives the best profit).