Assignment: Chapter 1-4 Practice Problem Solving:

1. A manufacturer of shopping cart for supermarkets purchased a new equipment that reduces the labor content of
the jobs involved in producing the shopping carts. Prior to buying the new equipment, the company used five
workers, who produced an average of 80 carts per hour. Labor cost was 60 per hour and machine cost was 140 per
hour. With the new equipment, it was possible to transfer one of the workers to another department, equipment
cost increased by 20 per hour while output increased by four carts per hour. What is the peso productivity before
purchasing the new equipment. Use carts per peso cost (labor + equipment) as the measure.

a. .18 carts/peso cost b. .16 carts/peso cost c. .19 carts/peso cost d. .21 carts/peso cost

2. A manufacturer of shopping cart for supermarkets purchased a new equipment that reduces the labor content of
the jobs involved in producing the shopping carts. Prior to buying the new equipment, the company used five
workers, who produced an average of 80 carts per hour. Labor cost was 60 per hour and machine cost was 140 per
hour. With the new equipment, it was possible to transfer one of the workers to another department, equipment
cost increased by 20 per hour while output increased by four carts per hour. What is the peso productivity after
purchasing the new equipment. Use carts per peso cost (labor + equipment) as the measure.

a. .18 carts/peso cost b. .16 carts/peso cost c. .19 carts/peso cost d. .21 carts/peso cost

3. A manufacturer of shopping carts for supermarkets purchased a new equipment that reduces the labor content
of the jobs involved in producing the shopping carts. Prior to buying the new equipment, the company used five
workers, who produced an average of 80 carts per hour. Labor cost was 60 per hour and machine cost was 140 per
hour. With the new equipment, it was possible to transfer one of the workers to another department, equipment
cost increased by 20 per hour while output increased by four carts per hour. What is the labor productivity before
purchasing the new equipment. Use carts per worker per hour as the measure of labor productivity.
a. 16 carts/laborer b. 17 carts/laborer c. 19 carts/laborer d. 21 carts/laborer
4. A manufacturer of shopping carts for supermarkets purchased a new equipment that reduces the labor content
of the jobs involved in producing the shopping carts. Prior to buying the new equipment, the company used five
workers, who produced an average of 80 carts per hour. Labor cost was 60 per hour and machine cost was 140 per
hour. With the new equipment, it was possible to transfer one of the workers to another department, equipment
cost increased by 20 per hour while output increased by four carts per hour. What is the labor productivity after
purchasing the new equipment. Use carts per worker per hour as the measure of labor productivity.
a. 21 carts/laborer b. 17 carts/laborer c. 19 carts/laborer d. 16 carts/laborer

5. What is the average Value of a Loyal Customer if average customer defection rate is 25%, frequency of
repurchase is twelve times every two years, contribution margin is 40%, and average purchase price is 250?
a. 2,400 b. 2,300 c. 2,050 d. 2,100

6. Productivity measures for a manufacturing plant over a six-month period follow:

Using January as the base period, compute a productivity index for February to June, and comment on what
those productivity indexes tell about the productivity trend.

7. A major airline is attempting to evaluate the effect of recent changes it has made in scheduling flights between
New York City and Los Angeles. Data available are shown below.

Using passengers per flight as a productivity indicator, comment on the apparent effect of the schedule
change.
8. A hamburger factory produces 60,000 hamburgers each week. The equipment used costs $10,000 and will
remain productive for four years. The labor cost per year is $13,500.

a. What is the productivity measure of “units of output per dollar of input” averaged over the four-year
period?

b. We have the option of $13,000 equipment, with an operating life of 5 years. It would reduce labor costs to
$11,000 per year. Should we consider purchasing this equipment (using productivity arguments alone)?

9. A factory produces 10,000 desk staplers each week. The equipment used costs $50,000 and will remain
productive for three years. The labor cost per year is $180,000.

a. What is the productivity measure of “units of output per dollar of input” averaged over the three-year
period?

b. We have the option of buying $80,000 of new equipment, with an operating life of six years. It would
reduce labor costs to $104,000 per year. Should we consider purchasing this equipment (using
productivity arguments alone)?

10. A manufacturing firm uses two measures of productivity:

a. Total sales/Total inputs

b. Total sales/Total labor inputs

Given the data for the last three years below, calculate the productivity ratios. How would you interpret the
results? All figures are in dollars.

11. If the customer defection rate is 17.5 percent, what is the customer retention rate?

12. What is the average defection rate for grocery store shoppers in a local area of a large city if they spend $50
per visit, shop 52 weeks per year, the grocery store has a 16% gross contribution margin, and the value of a
loyal customer is estimated at $2,000 per year?

13. What is the value of a loyal customer (VLC ) in the small contractor target market segment who buys an
electric drill on average every four years (or every 0.25 year) for $100, when the gross margin on the drill
averages 50 percent, and the customer retention rate is 60 percent? What if the customer retention rate
increases to 80 percent? What is a 1 percent change in market share worth to the manufacturer if it represents
100,000 customers? What do you conclude?

14. If a coffee shops average transaction price is $4.00, their gross margin is 60 percent, the typical customer
makes a purchase once a week or 52 weeks per year, and management estimates the value of a loyal
customer over their buying life cycle as $520, what is the customer defection rate?

15. Southland Corporation's decision to produce a new line of recreational products has resulted in the need to
choose one of two automated manufacturing systems based on proposals from two vendors, A and B. The
economics of this decision depends on the market reaction to the new product line. The possible long-run demand
has been defined as low, medium, or high. Based on detailed financial analyses of system costs as a function of
volume and sales under each demand scenario, the following payoff table gives the projected profits in millions of
dollars.

a. Determine the best decisions using the maximax, maximin, and opportunity loss decision criteria.

b. Assume that the best estimate of the probability of low long-run demand is 0.20, of medium long-run
demand is 0.15, and of high long-run demand is 0.65. What is the best decision using the expected value
criterion?
16. The Gorman Manufacturing Company must decide whether to purchase a component part from a supplier or to
manufacture the component at its own plant. If demand is high, it would be to Gorman's advantage to manufacture
the component. If demand is low, however, Gorman's unit manufacturing cost will be high because of
underutilization of equipment. The projected profit in thousands of dollars for Gorman's make-or-buy decision is
as follows.

a. Determine the best decisions using the maximax, maximin, and opportunity loss decision criteria.

b. Assume that the probability of low demand is 0.35, of medium demand is 0.35, and of high demand is 0.30.
What is the best decision using the expected value criterion and what is the expected value of perfect information?

17. You need to expand your small business, Paddle Incorporated that manufactures paddle board rackets. The fixed
cost for the new technological advanced equipment is $15,000. The variable cost to produce each unit using the
new equipment is $10, and the selling price for the finished product is $25. What quantity needs to be produced and
sold to break even?

18. The Vera Molding company has two alternatives for meeting a customer requirement for 9,000 units of a
specialty molding. If done in-house, fixed cost would be $350,000 with variable cost at $30 per unit. Alternative two
is to outsource for a total cost of $80 per unit.

a. What is the breakeven quantity?

b. Should the firm make the 9,000 units in-house or outsource?
19. Meyers Window Company introduced a new window design but sales were below expectations. Sales in units
last year were 800 units. Variable cost per unit averaged $105.72, the fixed cost was $42,000, and the selling price
was $149.99.
a. What is the breakeven quantity for this new window?

b. If sales stayed the same next year, how much would the variable cost have to be reduced to breakeven?
20. Pesto Restaurant must decide between two types of technology in its kitchen. Option A is to use an induction
oven process with a fixed cost of $20,000 and a variable cost of $6.51 per meal. Option B is to use a gas-fired
oven process with a fixed cost of $12,000 and a variable cost of $7.86 per meal. The average selling price per
meal is $18.60.
a. What is the breakeven quantity?
b. If the restaurant manager expects to sell 1,500 meals, which option, A or B, is best?