## Matching Supply with Demand An Introduction to Operations Management 4Th Edition By Gerard Cachon – Test Bank

Matching Supply with Demand: An Introduction to Operations Management, 4e (Cachon)

Chapter 6 The Link between Operations and Finance

[The following information applies to questions 1-3.]

Full Limo Inc

Full Limo Inc. offers high-end transportation services between the King of Prussia Mall (KPM) and Center City Philadelphia (22.5 miles). The invested capital is $800,000, corresponding to the investment in the 4 luxury vans it owns (you can ignore all other invested capital). Each van can carry 10 passengers. Each van makes 12 daily trips from Philadelphia to KPM and 12 daily trips from KPM to Philadelphia. The company charges $10 for each one-way ride. The current load factor is 40% (that is, each ride has 4 passengers on average). A significant source of operating costs is the fuel cost. The company vans have a fuel economy each of 20 mpg (miles/gallon). Current fuel prices are $2.629/gallon. The staff costs and other costs of operating the service and running the business are $1M per year. The company operates 365 days a year.

1) Draw an ROIC (return on invested capital) tree for the company.

Answer:

Explanation: ROIC = Profit / IC = (Revenue – Costs)/ IC

Difficulty: 3 Hard

Topic: Building an ROIC Tree

AACSB: Knowledge Application

Blooms: Apply

2) What is the ROIC?

Answer: 37.25%

Explanation: Revenues = 24 * 4 * 4 * 10 * 365 = 1,401,600

Costs = 1,000,000 + 24 * 4 * 22.5 * 365 * 2.629/20 = 1,103,635

Profits = 1,401,600 – 1,103,635 = 297,965

ROIC = 297,965/800,000 = 37.25%

Difficulty: 3 Hard

Topic: Building an ROIC Tree

AACSB: Analytical Thinking

Blooms: Analyze

3) Assume that the company can increase the fuel efficiency of the vans to 25mpg. What would be the new ROIC?

Answer: 39.84%

Explanation: Revenues = 24 * 4 * 4 * 10 * 365 = 1,401,600

Costs = 1,000,000 + 24 * 4 * 22.5 * 365 * 2.629/25 = 1,082,908

Profits = 1,401,600 – 1,082,908 = 318,692

ROIC = 318,692/800,000 = 39.84%

Difficulty: 3 Hard

Topic: Valuing Operational Improvements

AACSB: Analytical Thinking

Blooms: Analyze

[The following information applies to questions 4-5]

Five Seasons Hotel

Five Seasons Hotel is a chain with 10 hotels. Strategically, the chain implements a cookie-cutter approach to building and running its hotels, in that all hotels are practically identical. Five Seasons invested $150 million in acquiring the land for all hotels and $500 million in building and furnishing the 10 hotels to a guest-ready stage. Each hotel has 150 rooms. Each room has a rack rate of $200 per night, but the hotel gives an average discount of $30 per night off this base price. Each hotel costs $1 million in materials to run and is staffed by 58 employees, each paid an average compensation of $50,000 a year. This staffing level implies a certain service level, which together with the rack rate and discount, determines the chain’s average occupancy rate—the percent of available rooms sold—in this approximate way:

Chain-wide average occupancy rate = 0.01 × number of employees per hotel – (0.0015 × base Price) + (0.01 × discount), subject to a maximum of 100% and a minimum of 0% (base Price and discount are expressed in [$]). The company operates 365 nights a year.

4) What is the ROIC?

Answer:

Difficulty: 3 Hard

Topic: Building an ROIC Tree

AACSB: Knowledge Application

Blooms: Apply

5) Reducing the number of employees reduces staffing costs, but it also reduces the occupancy rate when service level drops. What is the ROIC if Five Seasons reduces the number of employees to 50 per hotel?

Answer: 1.78%

Explanation: Revenues = 10 * 150 * .5 * (200-30) = 46,537,500

Labor Costs = 10 * 50 * 50,000 = 25,000,000

Expenses = 10,000,000 + 25,000,000 = 35,000,000

Profits = 46,537,500 – 35,000,000 = 11,537,500

ROIC = 11,537,500 / 650,000,000 = 1.78%

Difficulty: 3 Hard

Topic: Valuing Operational Improvements

AACSB: Analytical Thinking

Blooms: Analyze

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