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COLLEGE OF ENGINEERING

CASE STUDY 1: INTRODUCTION TO MANAGEMENT SCIENCE

In Partial Fulfillment
Of the Requirements in

IE 317 Operations Research 1

Submitted by:
Alfanta, Mitchel Lou J.
Auxtero, Michael John O.
Servano, Faith James B.
Submitted to:
Engr. Dyanne Brendalyn Mirasol-Cavero

October 2021
I. INTRODUCTION
This paper focuses on the application of the management science approach to
problem-solving using the scientific method. Given the four different case problems
to solve :(1) Molly Lai acquired Clean Clothes Corner Laundry business but they failed
to notice that dry-cleaning business is very competitive and that their success is based
more on price and quality service, including quickness of service than on the laundry’s
appearance. Molly then starts considering purchasing new equipment or machinery
that could substantially increase the speed at which she can dry-clean clothes and
improve their appearance or just improve the service of her business. Estimating the
volume and costs to ponder and contemplate if the new equipment is a good
purchase. Molly also considers if she would decrease her price per unit to increase her
profit when she would acquire the new equipment. (2) The students of the State
University namely: Vicki, Penny, and Darryl spend most of their time during summer
rafting down the Ocobee River in the nearby Blue Ridge Mountain foothills.

They also observed that there were also a lot of students who liked rafting in that river.
They noticed that several students who came to the river don’t have rubber rafts and
often ask to borrow theirs, with that nuisance they jump with an idea to provide an
opportunity to make some extra money. Considering starting a new enterprise, the
Ocobee River Rafting Company, to sell rubber rafts at the river. The three students
consider the things needed for their company to operate, such as purchasing a tent,
equipment, and rubber cutter. They also went through with their estimated costs such
as investments, material costs. Labor costs, shipping costs, etc. Later on, 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.
They got in touch with that company and got an alternative that would reduce the
amount of time, they would have to work pumping up the tubes and putting the rafts
together, and it would increase time for their schoolwork. Since the company would
be willing to supply them with rafts. However, the three students are much more
concerned about the large initial cost and worried about whether they will lose
money. (3) The town of Draper sits adjacent to the State University, which has an
enrollment population greater than the town of Draper’s population. The merchants
of Downtown Draper have long complained about the lack of parking available to their
customers. One of the primary reasons 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 multilevel
indoor parking facility downtown. Due to this, the town’s public works director has
developed plans for a facility that would cost millions to construct. To pay for the
project, the town would sell municipal bonds with a duration of 30 years with a given
interest. It is also estimated that a number of employees would be required to operate
the lot on a daily basis, at a specific total annual cost. The average hours that each car
enter the lot was also estimated, as well as the average pay fee. Further, it is estimated
that each car that parks in the lot would cost the town in annual maintenance for
cleaning and repairs to the facility. Therefore, it was needed to determine the number
of cars that would have to park in the lot to know whether it pays off the project within
a 30-year time frame. To determine the approximate number of cars that would have
to park in the lot on a daily basis and to know if it would be a reasonable number to
achieve, given the size of the town and college population, break-even analysis would
be used. (4) The town of Draper does not have a commercial airport, the nearest
airport is in Roanoke which is miles away from the town. The town council of Draper
along with the local Chamber of Commerce and the University is considering a joint
economic development plan. The project plans to run a bus service from the town of
Draper to the airport in Roanoke. There will be three passenger buses that cost
$400,000 a piece that will provide service for a 1.5-hour round trip daily, with a seating
capacity of 55 passengers each bus, and will operate for 365 days per year. The
operating cost per hour including fuel and driver salary for each bus is $90 per hour
per trip. Each bus will make 4 trips spread out during the day starting at 5 AM and will
pick up passengers from the airport after the last scheduled flight of the day.
 Passengers from work and school can also ride the bus and will be embarked and
disembarked at various stops along the route. The planned fare per rider is $4,
regardless of where they get on or off the bus. During the 6-year life span of the buses,
they would like to determine how many years would it take the service to break-even.
The town council would also want to determine the effect if the trips per day per bus
were reduced to 3 with a corresponding increase in passengers to 50 (due to the
increased demand for fewer trips).

These four case problems focus on the application of management science, specifically
the construction of model and model solution. The break-even analysis or the profit
analysis will be used in model building to identify the number of units of a product to
sell or produce that will equate total revenue with total cost. To know how the
answers or solutions to the problem have reached a point, see the discussions below.

II. DISCUSSION
In the first case problem, Molly's current monthly volume was queried. Since the
fixed cost, variable cost, and unit price have already been specified, it is much easier
to obtain the current monthly volume using the equilibrium volume formula. Since
the fixed cost is $ 1,700 per month, Molly charges her customers $ 1.10 per garment
and estimates her variable cost to be $ 0.25 per dry cleaning item. This results in the
current monthly volume of 2,000 items per month. If Molly buys the new
equipment, in 36 months she could have a fixed monthly cost of $ 450 from its new
equipment. Along with your current monthly fixed costs and your new equipment
monthly fixed costs, you can have a total of $ 2,150 monthly fixed costs. This gives
Molly a total volume of 2,529.4 items per month with her new outfit. It is now clear
that if she purchases a new machine or equipment for her business, she can receive
a total of 529.4 additional dry cleaning supplies each month to cover expenses.
Regardless, Molly estimates that with this new equipment she can increase her
volume to 4,300 items per month. Given the level of business, she can make a
profit by subtracting total costs from total revenue. Total revenue are the product
of the estimated volume of 4,300 and the unit price of $ 1.10. This brings total sales
to $ 4,730. Consequently, the total cost can be calculated from the specified fixed
cost of $ 2,150, the volume of $ 4,300, and the variable cost of $ 0.25. The total cost
is $ 3,225. If you subtract the total costs from the total sales, Molly would make a
profit of $ 1,505 per month. Over the next 3 years, Molly would make a total profit
of $ 1,955 per month. However, her Molly believes that if she does not buy the new
devices, but reduces their price to $ 0.99 per item, she will increase her business
volume. If she lowers her price to $ 0.99 per item, she can have a total of 2297.3 as
her new break-even volume. On the other hand, if your price reduction results in a
monthly volume of 3,800 items, you will make a total monthly profit of $ 1,112. Still,
Molly estimates that if you buy the new equipment and lower its price to $ 0.99 per
item , its volume will increase to about 4,700 units per month. Given these
estimated and assumed values, Molly can make a total profit of $ 1,328, which is less
than the profit she was able to make at her previous unit price of $ 1.10.

In the case of the second problem, two alternative solutions are offered. First, the
three students applied to establish the Ocobee River Rafting Company to sell rubber
rafts on the river. They determined that their initial investment would be about $3,000
to rent a small piece of land by the river to build and sell rafts; buy tents to operate
and buy small items like air pumps and rope cutters. They estimate that the cost of
labor and materials for each raft will be about $12, including the cost of purchasing
and shipping the rubber hose and rope. They plan to sell the raft for $20 each, which
they say is the maximum price a student will pay for a pre-assembled raft. With these
values it is now easier to calculate the volume of this alternative. That's 375 rafts. On
the other hand, the second alternative arose when they contacted the newly formed
North Carolina company that basically did what they set out to do. They contacted
one of that company's operators and he told them that the company would be willing
to supply rafts to the Ocobee River Rafting Company for a flat fee of $9,000 plus $8
per raft plus shipping. (The Ocobee River Rafting Company would still have to lease
the riverfront lot and tent for $1,000.) The rafts would have already been inflated and
assembled. This option appeals to Vicki, Penny and Darryl because it will reduce the
time they will have to work on pumping the tubes and assembling the rafters, and it
will increase their homework time. However, the students are still considering
alternatives, giving them a mass of 833.33 rafts. Although students prefer the
alternative of buying rafts from the North Carolina company, they are concerned
about the high upfront costs and worry whether they will lose money. Before making
a decision, they think that they must first determine how many rafts they need to sell
with each option to make a profit and which one best suits different levels of demand.
In addition, Penny conducted a brief sample survey of the river's inhabitants and
estimated that summer raft demand would be around 1,000 rafts. If demand is
expected to be between the lowest fixed cost volume of 375 and the highest fixed cost
volume of 833.33, alternative 1 is selected. However, the demand is more than 833.33
rafts. To determine which alternative to use, the two cost functions will be assimilated.
Give the point of indifference of the two alternatives for a total volume of 1750 rafts.
With this, the three students can now create guidelines to see which alternative they
should choose. If the demand is greater than the volume of the lowest fixed costs, but
less than the volume of the highest fixed costs, they must choose an alternative.
However, if the demand is greater than the volume of the highest fixed costs, the
second alternative is used. Since the demand is 1000 rafts based on their research
conducted, an alternative is highly recommended. Using the alternative's values and
costs, the three students can make a profit of $5,000.

In the case of the third problem, the break-even formula is used to determine the
number of cars that must be parked in the parking lot each year to pay off the project
for 30 years. Since the associated costs have been shown, it is much easier to calculate
the number of cars parked in a parking lot using the break-even formula. The break-
even formula is determined by dividing the total fixed costs associated with
production by unit revenue minus the variable cost per unit. Since fixed costs include
investment costs ($4.5 million/30 years) of $150,000, annual labor costs of $140,000,
and interest costs of $360,000 (8% of 4.5 million dollars), the result is a total fixed cost
of $650,000. . To calculate, divide the total fixed costs by the indicated fee per car of
$3.20 minus variable costs of $0.60. Therefore, the amount generated for parking
should be at least 250,000 cars in one year. If concentrated 365 days a year, the
estimated number of parking spaces in the parking lot would be at least 685 cars per
day.

As for the last problem, the joint economic plan for the city of Draper, which wants to
start operating a bus service, requires a lot of planning. In the first year with the data
provided by the case, the city will lose $1,143,060 and up to the 6-year life of the buses
it would still not be cost-effective, only after 21 years. However, if the average number
of passengers increased to 45, the city would be able to break even in the 6-year life
of the buses. And since the bus can carry 55 passengers, if the average number of
passengers rises to 50, it will only take 4.21 years for the buses to break even. The
increase in the number of travelers will therefore play an important role in the balance
of the city. The decrease in the number of trips per day and with almost full passenger
capacity is better compared to 4 trips per day and with only 37 average passengers, as
the results show that the city can make profits even faster with fewer trips per day
and with almost full capacity. The city estimates that the project could receive a
federal grant to pay for the purchases of the buses, which will cost $1,200,000 and, if
possible, will provide significant relief to the project's problems. The city does not have
to pay for the purchase of the buses, it only pays the cost of operating 3 buses for 365
days, which costs $591,300. In the first year of operation, the city will start to generate
a profit and during the year it may even break even.
III. CONCLUSION

To sum everything that has been state so far,break-even analysis was very helpful in
this case study. Profits are determined and also help entrepreneurs make good
decisions. To sum up the four different issues of the case, here are the conclusions
drawn after doing what was required in the case: (1) Molly Lai has to buy new
equipment or machines in her laundry business to improve her services which can
increase basically the speed at which she can dry clean clothes and improve their
appearance. In addition, he can also increase his profits by having new equipment.
However, it is not permissible to lower the price per unit because as can be seen from
the calculation, the profit will be reduced. (2) After analyzing the Ocobee River Rafting
Company, the best alternatives for different levels of demand have now been
determined. Alternative two indicates that it should be selected because of the
demand for about 1,000 rafts. Thus, 1000 rafts fall within the range or guideline which
states, if the demand is greater than the volume of the first 375 alternatives but less
than the point of indifference between the two alternatives, then the second
alternative should be used. Using the questions Penny got from her survey sample,
they were able to make a total profit of $5,000. (3) the construction of a new parking
lot in the city center for city dwellers appears to have cost more than 30 years.
Moreover, it seems an achievable goal given the size of the city and the student
population. (4) The joint economic plan of the city of Draper is beneficial for the city
especially for its residents because it will be easier for them to get a ride and can bring
economic development to the city. The federal grant that provides cash assistance for
the project plays an important role as it eliminates the cost of buying buses. However,
if there is no government assistance, then the city will need time to break even.
Maximizing day trips, increased bus usage and consistency will also benefit the city
breaking even earlier. If there is no federal grant guarantee, the project must be
carefully planned to achieve the desired outcome.
IV. REFERENCES
Taylor III, B. W. (2016). Introduction to Management Science (12th ed.). Retrieved from
pdfcoffee.com

Adam H. (2021). Break-even Analysis. Retrieved from

https://www.investopedia.com/terms/b/breakevenanalysis.asp

V. APPENDIX