Expert Answer:add to my report what is the correct contribution

Answer & Explanation:Please read the Case Text “Vine street” and correct aimee’s analysis cause its flawed .one out of the three attachments (vine street Q3) is my work if you dont mind adding to it and editing it if neededClass Notes:is she using it correctly?what problem might there be? new customers column isnt adding up to the chart given (add up columns to figure out then calculate the difference in each column and that will show how many additional customers at that time and check with her number) it should be wrong, her analysis is flawedfor marginal revenue she used additional revenue per customer x by # of customers (ex $7 x 10 = $70)actually calculate it by adding up all purchase revenue and get the mean and add up all purchase costs and get mean then subtract the two. then put this info into the chart where you multiply it by the new customers (attachment 3) MC^2 #’s should be pretty constant because its including electricity and things like that, added profit per day x by 360 in order to get the profit per year
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Vines Street
Q. 3.
Is Aimee using marginal cost and marginal revenue correctly in her analysis? Explain the
errors in her analysis, if any. [Hint: Think about Bruce Morgan’s questions.]
Both the marginal revenue and cost approach of maximizing profits is one of the
approaches that is used in economics to determine both the price per unit and the amount of
output needed to maximize the profits. Vines Street as any other rational business wants to
maximize its profits and that is the reason that they are considering opening for additional hours.
The relationship between the marginal revenue and the marginal cost helps to tell us about the
point at which the maximum profits occur. This approach shows us that maximization of profits
occurs at the point where the marginal costs equals the marginal revenues. The marginal costs
should take into account both the variable costs and fixed costs (Hall, 2018). The marginal cost
of production is the additional cost of opening the business for an extra one hour. The cost
should be one and not two as the operations manager is putting them (Hall, 2018). To get the
marginal costs, they should add up the cost of production for both the additional unit of beer and
also the cost of paying the clerks.
To make the analysis more accurate, the operations manager should use the data sample
from the evening hours especially the hours after their usual closing hours which is 10 P.M. This
would have given a better insight on the costs of the additional opening hours and would have
helped in knowing if the real marginal costs and the marginal revenues for that period. Thus the
use of the average purchase overall hours of operation made the analysis biased. From the data,
we can see that the clients who come in very late hours may not come earlier if the business
closed prior. The reason for this conclusion is that the customers who visit the store in the late-
night hours are additional and not the usual customers, thus they lead to an increase in the overall number of clients for the day. Consequently, I think the operations manager should do a
further analysis and make a consideration on the above mentioned factors so that they may make
a more informed decision.
Reference
Hall, R. E. (2018). New evidence on the markup of prices over marginal costs and the role of
mega-firms in the us economy (No. w24574). National Bureau of Economic Research.
VINES STREET
“Aimee, as you know, the Gould state legislature passed legislation last year allowing alcoholic
Center 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.”
Bruce Morgan, General Manager of Vines Street, spoke these words to Aimee Novak, his Operations
Manager. Vines Street is a major beverage retailer. It owns several wine and spirit stores that are part of
its alcoholic Center division. Vines Street 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 Bruce Morgan’s request, Aimee Novak asked her accountant, Anne Shen, 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. Anne 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, Anne remarked, “Aimee, 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 Anne, Aimee Novak decided to experiment with different closing
times for the store. Because Aimee 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 Vines Street 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, Aimee sent her analysis to Bruce. Her analysis is reproduced in
Exhibit 1 below.
Exhibit 1
Aimee Novak’s Analysis of Store Hours
MEMORANDUM
TO:
FROM:
RE:
DATE:
Cc:
Bruce Morgan, General Manager, Vines Street, Inc.
Aimee Novak, Operations Manager
Extending store hours of operation for Vines Street
13 November 2007
Anne Shen
I have now completed a study of the economics of extending the store closing hours for Vines
Street. 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.)
•
Anne’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 overall 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).
Later that week Aimee and Bruce met to discuss Aimee’s analysis. “Aimee”, began Bruce, “I appreciate
the work that you and Anne have put into this analysis. Obviously, you two have collected a lot of data
and thought this through carefully. However, I am unclear about a few things and I would appreciate it if
you could clarify them for me. First, I don’t get this ‘marginal approach.’ I took economics in college, and
I am embarrassed to admit that I heaved a sigh of relief and promptly forgot everything once the course
was over. I am confused about how there can be two marginal costs in this situation, one for liquor and
the other for the sales clerks. Second, Anne’s sample suggests that evening customers seem to
purchase a higher amount. Why then did you use the average purchase overall hours of operation?
Third, I wonder if some customers who arrive during the very late hours might arrive earlier if the store
closed earlier. Can you tell from your experimental data if that’s true? And would that change your
recommendation?”
Required:
Assume that you are Aimee Novak and you have been asked to elaborate on the memo in Exhibit 1 to
address the issues raised by Bruce Morgan in both of his conversations with you. Use the report form
from the course website.
This case reviews the following LDC concepts: Financial accounting 4 and 9; management accounting 2
and 8; microeconomics 6 and 7; and statistics 2 and 4.
Attachment 1
Purchases and Purchase Cost for Randomly Selected Customers
Anne randomly selected 60 customer invoices – 30 from day customers, 30 from evening customers.
The purchase revenue and cost data are shown below. (For example, the first day customer made a
purchase of $27.50, and the alcohol purchased cost $20.89 to stock.)
DAY
Purchase
Revenue
Cost
EVENING
Purchase
Revenue
Cost
27.50
20.89
35.29
29.00
30.22
22.90
29.66
22.20
34.99
27.40
30.87
21.01
18.08
13.53
31.40
25.60
34.48
25.32
25.95
21.95
25.55
17.17
28.69
19.42
19.77
15.49
28.82
22.89
25.13
18.11
29.92
20.07
26.16
21.91
30.15
22.39
29.67
22.75
27.89
19.99
27.37
22.03
31.30
25.63
35.71
26.61
33.44
26.51
28.07
20.31
27.49
22.36
38.86
26.51
29.91
22.26
40.88
33.39
47.78
34.08
37.31
26.83
32.43
25.81
31.69
26.89
25.20
16.86
38.59
25.51
32.99
23.54
26.38
20.55
21.90
16.19
27.09
18.66
42.19
31.88
21.78
14.93
28.48
22.12
21.39
15.38
39.20
33.09
28.84
19.96
28.52
19.76
27.39
22.24
32.15
23.24
20.29
14.72
30.81
23.79
16.11
11.41
32.61
22.68
22.60
19.23
25.29
21.51
32.79
22.50
26.07
20.27
33.37
26.00
19.35
16.50
22.14
18.31
29.90
25.07
Attachment 2
Customers per Hour During Experimental Period
Over a period of several months, Vines Street tested closing at seven different times — each hour from 10
p.m. to 4 a.m. Each closing time was tested for two weeks. The table below shows the average number
of customers during each hour of business, for the nine different closing times. For instance, the first
column shows the average number of customers for each hour of business during the period when our
closing time was 10 p.m.
10pm
11-12noon
12-1pm
1-2pm
2-3pm
3-4pm
4-5pm
5-6pm
6-7pm
7-8pm
8-9pm
9-10pm
10-11pm
11-12mid.
12-1am
1-2am
2-3am
3-4am
4
5
7
10
11
11
11
12
13
14
14
Customers per Hour if Closing Time Is:
11pm
12am
1am
2am
3am
4
4
4
4
4
5
5
5
5
5
7
7
7
7
7
10
10
10
10
10
11
11
11
11
11
11
11
11
11
11
11
11
11
11
11
12
12
12
12
12
13
13
13
13
13
13
13
13
13
13
13
12
12
12
12
12
11
10
10
10
10
9
8
8
8
7
6
7
6
6
4am
4
5
7
10
11
11
11
12
13
13
12
10
8
6
5
5
5
The last column on the right (4am closing time) was used to find “customers per hour” for the table in
Attachment 3.
Attachment 3
Marginal Revenue and Marginal Cost Analysis
Hour
New
Customers
MR1
MC2
Added
Profit
Added Profit per
Year3
10-11
10
70.00
20.00
50.00
18000.00
11-12
8
56.00
20.00
36.00
12960.00
12-1
6
42.00
30.00
12.00
4320.00
1-2
5
35.00
30.00
5.00
1800.00
2-3
5
35.00
30.00
5.00
1800.00
3-4
5
35.00
30.00
5.00
1800.00
113.00
40680.00
1 The
marginal revenue (MR) for the hour is the contribution margin per customer ($7.00) multiplied by the
number of customers. Note that if the marginal revenue is calculated in this way, it already takes into
account the alcohol cost.
2 The
marginal cost (MC) for the hour is the wages for two clerks: $10 per hour before midnight, $15 after
midnight.
3
There are 360 days in one business year.
Vines Street
Student Coaching Slides
Basic Facts of the Case
◼
◼
◼
◼
New state law allows liquor stores to stay
open until 4 a.m.
Store currently stays open until 10 p.m.
Based on her research, Aimee Novak
recommended extending hours until 4 a.m.
Bruce Morgan asked Aimee Novak to check
her analysis and revise her recommendations
if necessary.
Economics Background
◼
◼
◼
◼
Concept: Using marginal cost (MC) and
marginal revenue (MR) to make profitmaximizing decisions
MC = additional cost from doing one more of
something
MR = additional revenue from doing one
more of something
Do more when MR > MC. Do less when MR
< MC. This will maximize profits. Economics Background, cont. ◼ MR/MC method is usually used to find profitmaximizing quantity of output. ◼ But it can be used for many other things. ◼ Here, it’s used to find how many hours to stay open. Accounting Background ◼ ◼ ◼ ◼ Contribution Margin (CM) is sales revenue minus variable cost. CM is usually per unit of output, but it can also be found for other cost objects. In this case, we use the CM/customer. CM/customer is the price of goods sold minus the cost of goods sold to the average customer. Accounting Background, cont. ◼ Breakeven customers for a time period = added cost for that time period divided by CM per customer. ◼ Safety margin = expected number of added customers minus breakeven number of added customers. Statistics Background ◼ Regression of a dependent variable Y on an independent variable X gives you an estimated equation of a line: Y = a + bX a = coefficient on intercept b = coefficient on independent variable X ◼ Use p-value on the intercept coefficient to see if it is statistically significant. p-value should be less than significance of .05. Statistics Background, cont. ◼ ◼ ◼ ◼ Difference of means test: determines whether two samples are likely to have come from different populations. In this case, are evening customers significantly different from day customers in their buying behavior? Use two-tail test, because the difference could go either way. Excel will do almost all of this for you! ... Purchase answer to see full attachment