What closing time should 21 st Century Liquors choose to maximize profits? Calculate the increase in profits (relative to the current closing time of 10pm) that would result from extending store hours

What closing time should 21 st Century Liquors choose to maximize profits? Calculate the increase in profits (relative to the current closing time of 10pm) that would result from extending store hours

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21st Century Liquors "Janice, as you know, the Gould state legislature passed legislation last year allowing alcoholic beverages to be sold

What closing time should 21st Century Liquors choose to maximize profits?  Calculate the increase in profits (relative to the current closing time of 10pm) that would result from extending store hours to 4am.  If you recommend a different closing time, calculate the increase in profits (again relative to the current closing time) that would result from your recommendation. 

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21
st
Century Liquors

“Janice, as you know, the Gould state legislature passed legislation last year allowing alcoholic
beverages to be sold in retail establishments until 4:00 a.m. We don’t have to close our shop by 10
p.m. as required by the previous law.
However, I am wondering if it is economical for us to open
until 4:00 a.m.
How many additional customers would we get by extending our hours?
Would
doing so increase our profits?
I would like you to look into this issue for our downtown location and
give me your recommendation.”
Ted Radcliff, General Manager of B&J Beverages, spoke these words to Janice Wilton, his Operations
Manager.
B&J is a major beverage retailer.
It owns several wine and spirit stores that are part of its
alcoholic beverages division.
21
st
Century Liquors is part of this chain of stores owned by the parent
company.
It is located in the downtown area, and while it has been reasonably profitable in the past, its
financial performance has been declining in recent years.
A store manager, an assistant manager, and two sales and inventory clerks run the store.
The division
provides general business and administrative support to each store.
These services include purchasing,
bookkeeping, economic analysis, and legal advice.
To respond to Radcliff’s request, Janice Wilton asked her accountant, Shawna Hakimian, to provide her
with some data on the revenue and costs for the store.
Specifically, she wanted to know the average
purchase per customer and the cost of extending the store hours.
Shawna decided to sample a small set
of customer invoices to see what they purchased.
She selected two random samples of 30 customers
each and analyzed what they had bought and the cost of the items that they had purchased.
One sample
represented “day customers” (those who purchased before 6:00 p.m.) and the other was for “evening
customers” (those who purchased after 6:00 p.m.).
Attachment 1 provides this data.
During the data presentation, Shawna remarked, “Janice, there are two other things you should know
about extending our hours.
First, we will have to pay a 50% overtime bonus to our two night salespeople
at the store for any hours after midnight.
Second, we will have to invest in a better security system.
I
estimate that this will cost us approximately $21,000 in construction and rewiring cost.
The improvements
will have a life of seven years and we depreciate our assets using the straight-line method.
The
improvements are expected to have no salvage value.”
After looking at the data collected by Shawna, Janice Wilton decided to experiment with different closing
times for the store.
Because Janice felt that the store closing was not simply a choice between two
options — 10:00 p.m. and 4:00 a.m. — she asked the 21
st
Century Liquors store manager to experiment for
two weeks each with different closing times.
She wanted to know how many customers came in during
each hour of business for each closing time.
She did this by progressively extending the closing time
beyond 10:00 p.m. until 4:00 a.m.
Attachment 2 summarizes the results of her experimentation with
hours of operation.
When all of the data was collected, Janice sent her analysis to Ted.
Her analysis is reproduced in Exhibit
1 below.

Copyright, Glen Whitman and Shahid Ansari, 2009.

View the Answer

Exhibit 1
Janice Wilton’s Analysis of Store Hours
MEMORANDUM
TO:
Ted Radcliff, General Manager, B&J Beverages, Inc.
FROM
:
Janice Wilton, Operations Manager
RE:
Extending store hours of operation for 21
st
Century Liquors
DATE
:
13 November 2007
Cc
:
Shawna Hakimian
I have now completed a study of the economics of extending the store closing hours for the
21
st
Century Liquors.
On the basis of my analysis, I recommend that we extend store hours to
the statutory limit of 4:00 a.m. each morning.
This will result in an increased
annual
profit of
more than $40,000 before taxes.
Even after the initial investment of $21,000 to upgrade
security, we will still have increased profit.
I have reached this conclusion based on the
following information and analysis.

When we kept the store open until 4:00 a.m. on an experimental basis, we discovered the store
got an average of five customers per hour even during the last hour of business, from 3:00 to
4:00 a.m.
The number of customers was at least as large during each previous hour.
(Attachment 2 summarizes the results of our experimentation with hours of operation.)

Shawna’s sample of invoices shows that, on average, a typical customer makes purchases of
about $29.
(Note:
all dollar figures in this memo are approximate.)
From my experience
running the store, I can say that this number is consistent over all hours of operation (i.e., a day
customer’s buying decisions are not substantially different from an evening customer’s buying
decisions).

Out of the $29, about $22 goes toward our purchase of the alcohol, which leaves us with a
contribution margin of $7.00 per customer.
This figure does not include the cost of keeping the
store open an additional hour.
Therefore, the contribution margin of the additional units sold
during the 3:00 to 4:00 a.m. period is $7.00 x 5 customers = $35.00.
By keeping the store open for the additional hour from 3:00 to 4:00 a.m., we would increase
our revenues by $35.00.
We must compare this to the added cost of keeping the store open
one more hour.
The overhead cost of the additional hour is almost nothing (since the
refrigerators must be kept running overnight anyway), so the only substantial cost added is the
wage of the clerks.
By Gould state law, we must pay workers time-and-a-half, so our $10/hour
clerks must be paid $15 each.
The added cost of $30 is less than the added revenue of
$35.00, and therefore staying open until the last hour would increase our profits.
The same is
true for all previous hours as well.
(These calculations are summarized in Attachment 3.)
Comparing current profits with expected profits under my proposal, we will experience a profit
increase of $113 per day, or $40,680 per year, before taxes.
These figures are approximate,
of course, because there are seasonal changes in alcohol purchases, and my estimates are
based on experimentation during the last six months only.
This may seem an unusual approach for maximizing our profit, but I’m pretty sure it’s correct.
In my economics classes at Gould State, I learned that profit increases whenever marginal
revenue exceeds marginal cost.
The marginal revenue is the additional revenue from doing
one more of something (in this case, one more hour of business), and the marginal cost is the
additional cost from doing one more of something (again, one more hour of business).

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