Questions

1. [Textbook 10th edition, page 27; not in the 9th edition] The Morning Brew Coffee
shop sells regular, Cappuccino, and Vienna blends of coffee. The shop’s current
daily labor cost is $320, the equipment cost is $125, and the overhead cost is
$225. Daily demands, along with selling price and materials costs per beverage,
are given below.

Regular Cappuccino Vienna coffee

coffee’’’’’’’’’’’’’’’’’’’’’’’’
’

Beverages sold 350 100 150

Price per $2.00 $3.00 $4.00
beverage
Material $0.50 $0.75 $1.25

Harald Luckerbauer, the manager at Morning Brew Coffee Shop, would like to
understand how adding Eiskaffee (a German coffee beverage of chilled coffee,
milk, sweetener, and vanilla ice cream) will alter the shop’s productivity. His
market research shows that Eiskaffee will bring in new customers and not
cannibalize current demand. Assuming that the new equipment is purchased
before Eiskafee is added to the menu, Harald has developed new average daily
demand and cost projections. The new equipment cost is $200, and the overhead
cost is $350. Modified daily demands, as well as selling price and material costs
per beverage for the new product line, are given below.

Regular coffee Cappuccino Vienna coffee Eiskaffee

Beverages sold 350 100 150 75
Price per beverage $2.00 $3.00 $4.00 $5.00
Material $0.50 $0.75 $1.25 $1.50
output 700 300 600 375

a. Calculate the change in labor and multifactor productivity if Eiskaffee is

added to the menu.

Before = 350($2) +100($3)+150($4)/320 = 1600/320 = 5

After = 350($2) +100($3) +150($4) + 75($5) /320 = 1975/320 = 6.17
Change in labor: 6.17-5 = 1.17

Multifactor before = 1600/(350*0.5) + (100*0.75) + (150 * 1.25) + 320 + 125 + 225 =

1600/1107.5 = 1.44
M after = 1975/ (350*0.5) + (100*0.75) + (150 * 1.25) + (75 * 1.50) + 320 + 200 + 350 =
1975/1420= 1.39

Change in multifactor productivity = 1.44-1.39 = 0.05

b. If everything else remains unchanged, how many units of Eiskaffee would

have to be sold to ensure that the multifactor productivity increases from
its current level?

Output/Input = Coffee sold in $/Labor cost + Material cost + Equipment cost +

Overhead cost = 1.44
output Coffee sold in $
  1.4447
input Labor cos t  Material cos t  Equipment cos t  Overhead cos t

350($2)  100($3)  150($4)  x ($5)

 1.4447
$320  (350($.5)  100($.75)  150($1.25)  x($1.5))  200  350

$1600  $5.0 x
 1.4447
$1307.5  $1.5 x

$1600  $5 x  1.4447($1307.5  $1.5 x )

$1600  5 x  1888.945  2.1670 x

2.833 X  288.945

x  102

2. [Textbook 10th edition, page 46; 9th edition, page 48] Hahn Manufacturing
purchases a key component of one of its products from a local supplier. The
current purchase price is $1,500 per unit. Efforts to standardize parts succeeded to
the point that this same component can now be used in five different products.
Annual component usage should increase from 150 to 750 units. Management
 wonders whether it is time to make the component in-house, rather than to
continue buying it from the supplier. Fixed costs would increase by about $40,000
per year for the new equipment and tooling needed. The cost of raw materials and
variable overhead would be about $1,100 per unit, and labor costs would be $300
per unit produced.

a. Should Hahn make rather than buy?

Buy: 1500 * 750 = 1,125,000
Make: 40000 + (1100 * 750) + (300 * 750) = 1,090,000

Hahn should make as it will be cheaper.

b. What is the break-even quantity?

QBEP = FC/R-VC = 40000/1500-1100 = 100 (?)

c. What other considerations might be important?

3. The manager of a car wash must decide whether to have one or two wash lines.
One line will mean a fixed cost of $6,000 a month, and two lines will mean a
fixed cost of $ 10,500 a month. Each line would be able to process 15 cars an
hour. Variable costs will be $3 per car, and revenue will be $5.95 per car. The
manager projects an average demand of between 14 and 18 cars an hour. Would
you recommend one or two lines? The car wash is open 300 hours a month.

BEP 1 line: 6000/5.95-3 = 6000/2.95 = 2034

BEP 2 lines: 10500/5.95-3 = 10500/2.95 = 3560

Revenue/unit 5.95 Step Fixed Cost

Variable cost/unit 3 1 line 2 lines
Fixed cost 6000 10500
Range of volume 4500 900
Breakeven point 2034 3560

The manager should have 1 line. Between 14 and 18 cars per hours means 4200
and 5400 cars/month. The manager will make a higher profit with one line
compared to two lines.

4. [Textbook 9th and 10th edition, page 149] The manager of Perrotti’s Pizza collects
data concerning customer complaints about pizza delivery. Either the pizza
arrives late, or the wrong pizza is delivered.

Problem Frequency
Topping is stuck to box lid 17
 Pizza arrives late 35
Wrong topping or combination 9
Wrong style of crust 6
Wrong size 4
Pizza is partially eaten 3
Pizza never arrives 6

Use a Pareto chart to identify the "vital few" delivery problems.

This shows that the main complaints are regarding:

- Pizza arrives late
- Topping stuck to box lid
- Wrong topping
- Wrong style crust
These 4 complaints make up 84% of the total complaints.