VILLAGE HILL SPIRITS – HINTS
Assume that you are Grace Baker and you have been asked to elaborate on the memo in Exhibit 1 to address the issues raised by Jordan Wright in both of his conversations with you. Use the report form from the course website and please be certain to address all of the following issues:
What conditions would justify the assumption of a constant contribution margin per customer? Do you think those conditions are likely to hold here? To support your conclusions, do a scatter plot of the sample data, and then use the sample data to run a regression of purchase costs on purchase revenues. [Hint: Discuss is the meaning of the intercept term of your regression results?]
Is Grace using marginal cost and marginal revenue correctly in her analysis? Explain the errors in her analysis, if any. [Hint: Think about Jordan Wright’s questions.]
Is there a good reason to believe that evening customers purchase, on average, more than day customers? Support your answer by performing a statistical test on the difference between the mean day purchase and the mean evening purchase (using a two-tailed test).
What closing time should Village Hill Spirits choose to maximize profits? Calculate the increase in profits (relative to the current closing time of 10 pm) that would result from extending store hours to 4 am. 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.
a. Calculate the breakeven number of additional customers for each added hour of operation up to 4 am.
b. Calculate the breakeven number of additional customers for an entire year,
assuming (i) closing time of 4 am and then (ii) your recommended closing
time if it differs from 4 am.
c. Find the safety margin on new customers for the year.
[Hint: For the per-year analysis, remember to account for the cost of the security
upgrade. Use straight-line depreciation as a measure of the fixed cost of the security
upgrade, and then add the cost of overtime labor for the additional hours of business
for each of the 360 business days in the year.]
If there are any additional issues you think are relevant to the choice of closing time, be sure to mention them. Is there anything missing from the analysis? Are there any matters that require additional data collection or research?