Resource Economics 313
Introduction: Molly Lai had purchased the Clean Clothes Corner Laundry in a very wealthy neighborhood. Her expectations were to generate good business by improving the laundry’s physical appearance, so she invested a substantial amount of money to improve the interior and exterior appearance of the laundry mat. A year after she acquired the laundry mat, she was disappointed because she expected to make a profit but merely managed to break even. She then realized that the success of her company relied much more on the quickness and quality of her service than on the physical appearance of the laundry. In an effort to improve future business, Molly is considering purchasing a pressing machine at the…show more content… Long-term problems include whether or not to purchase the $16,200 new machinery that would increase the amount of clothes she could clean per day. It is also a problem if she purchases this expensive new machine, especially with the zero profit of her company, if she cannot acquire enough customers to make this purchase worth it. If she buys this new machine but only needs to clean enough clothes as her current demand, than the new equipment was an unnecessary use of her resources. Molly needs to decide if customers will start providing business to her store if she purchases this new machine. More specifically, she needs to decide if this new machine is worth the high fixed cost in the long run, allowing her to win over customers in this competitive market with professional and timely service.
B. Causes of Problem
Molly was only dry-cleaning 2000 items per month, with a contribution margin of $0.85. With her fixed monthly cost of $1,700 Molly is not making a profit, but rather just breaking even. (See graph 1.1 in Appendix A.) If the new equipment is purchased, the fixed cost jumps up by $16,200. The contribution margin remains the same, but instead of a constriction of 2,000 clothing items serviced monthly, the machine will allow 9,600 clothing items to be cleaned. This launches the monthly profit from $0 to $6460 without taking into account the cost of the new machine. Molly can cover the cost of the new machine, given the constraint of 320