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

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installed and can clean 40 clothes items per hour (or 320 items per day). Molly estimates her

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variable costs to be $0.25 per item dry-cleaned, which will not change if she purchases the

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new equipment. Her current fixed costs are $1,700 per month. She charges customers $1.10
per clothing item.

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a) 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 years? After 3 years?
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Answer:
vi y re

Profit = Revenue – Cost

Revenue = $1.1 x 4,300

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= $4,730

Fixed Cost = $1,700

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Variable Cost = $0.25 x 4,300

= $1,075
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Based on question, the $16,200 in new machinery will be spread up over 36 months
($16,200÷$450)

This will add $450 per month to her fixed costs making it total to $2,150 per month.

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 If, Molly’s costs do not change in the next 3 years; she can expect to see a monthly profit of
$1,505 for the next three years. The answer was derived by using the following equation:

Profit = Revenue – Cost

Z = $4,730 - $2,150 - $1,075

Z = $1,505

Molly’s monthly profit during the next 3 years is $1,505.

Once the new machinery is paid in full and Molly’s fixed costs return to $1,700 per month,

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her new monthly profit after 3 years will be $1,955. The answer was derived by using the

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following equation:

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Profit = Revenue – Cost
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Z = $4,730 - $1,700 - $1,075

Z = $1,955
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Once the new machinery is paid in full, Molly’s monthly profit after the next 3 years is
vi y re

$1,955.

b) Molly believes that if she doesn't buy the new equipment but lowers her price to
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$0.99 per item, she will increase her business volume. If she lowers her price, what
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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?
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Answer:
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Fixed costs are $1,700 per month

Variable costs are $0.25 per item

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Cost per item is $0.99

Break-Even is where Total Cost = Total Revenue

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 Hence, the break-even for Molly’s is

Total Revenue = Total Cost

0.99x = 1,700 + 0.25x

1700 = 0.99x – 0.25x

1700 = 0.74x

x = 2,297

Molly’s break-even volume is 2,297 items.

If her price reduction results in a monthly volume of 3,800 items

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Variable costs per item are $0.25

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Variable costs per month are 3,800 x $0.25 = $950.

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Revenue per item $0.99
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Revenue per month are 3,800 x $0.99 = $3,762

Profit = Total Revenue – Total Cost

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Profit = $3,762 - $950 - $1,700

vi y re

= $1,112
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So, Molly’s monthly profit will be is $1,112

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c) Molly estimates that if she purchases the new equipment and lowers her price to
$0.99 per item, her volume will increase to about 4,700 units per month. Based on
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the local market, that is the largest volume she can realistically expect. What should
Molly do?
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Answer:
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Fixed costs are $1,700 per month

Variable costs are $1,175 (4,700 x $0.25)

Revenue $4,653 (4,700 x $0.99)

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 All businesses are aim is to get more profit.

If, she did not purchase the new equipment, her profit will be

Profit = Total Revenue – Total Cost

Z = $4,653 - $1,175 - $1,700

Z = $1,778

If, Molly’s did not purchase the new equipment she can expect to see a monthly profit
of $1,778.

If, she buy the new equipment she has to take consideration the extra cost that she has to
add to the fixed cost. If the installment is for 3 years, this will add $450 per month to her

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fixed costs making it total to $2,150 per month. So her profit will be,

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Profit = Total Revenue – Total Cost

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Z = $4,653 - $1,175 - $2,150
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Z = $1,328
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Molly should not buy the new equipment because her monthly profit will decrease
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from $1,778 to $1,328.

vi y re
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sh

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