Posted: February 17th, 2017

What monthly profit would he realize with that level of business during the next three years? After three years?

3. When John Zoidberg purchased the New New York City Dry Cleaners, he thought that because of its good location near several high-income neighborhoods, he would easily generate business if he improved the building’s physical appearance. Therefore, he invested much his cash reserves in remodeling the exterior and interior of the business. However, he just broke even in the year following his acquisition of the dry cleaners, which he didn’t feel was a sufficient return given how hard he had worked. John didn’t realize that the dry cleaning business is very competitive and success is based more on price and quality service, including quickness of service, than on the building’s appearance.

In order to improve the quality of his service, John is considering purchasing new dry cleaning equipment, including a pressing machine that could substantially increase the speed at which he can dry clean clothes and improve their appearance. The new machinery costs $16,200 installed and can clean 40 clothes items per hour (the shop is open 8 hours a day, 365 days a year). He is considering the financing option offered by the manufacturer, which will allow him to pay off the machine in 36 months at 0% interest. John estimates that he spends $0.25 on supplies per item dry cleaned, which will not change if he purchases the new equipment. His current utility and property tax bills total $1,700 per month. He charges customers $1.10 per clothing item.
a. What is John’s current monthly volume?
b. If John purchases the new equipment, how many additional items will he have to dry clean each month to break even?
c. John estimates that with the new equipment, he can increase his volume to 4,300 items per month. What monthly profit would he realize with that level of business during the next three years? After three years?
d. John believes that if he doesn’t buy the new equipment but lowers his price to $0.99 per item, he will increase his business volume. If he lowers his price, what will his new breakeven volume be? If his price reduction results in a monthly volume of 3,800 items, what will his monthly profit be?
e. John estimates that if he purchases the new equipment and lowers his price to $0.99 per item, his volume will increase to about 4,700 units per month. Because of the local market, that is the largest volume he can realistically expect. What should John do?