When Molly Lai purchased the Clean Clothes Corner Laundry, she thought that she would automatically generate good business if she improved the laundry’s physical appearance because it was in a good location near several high-income neighborhoods. Thus, she initially invested a lot of her cash reserves in remodeling the exterior and interior of the laundry. However, she just about broke even in the year following her laundry acquisition, which she didn’t feel was a sufficient return, given how hard she had worked. Molly didn’t realize that the dry-cleaning business is very competitive. Success is based more on price and quality service, including quick service, than on the laundry’s appearance. To improve her service, Molly is considering purchasing new dry-cleaning equipment, including a pressing machine that could substantially increase the speed at which she can dry-clean clothes and improve their appearance. The new machinery costs ₱16,200 installed and can clean 40 clothes items per hour (or 320 items per day). Molly estimates her variable costs to be ₱0.25 per dry-cleaned item, which will not change if she purchases the new equipment. Her current fixed costs are ₱1,700 per month. She charges customers ₱1.10 per clothing item. Questions 1. Molly believes that if she doesn’t buy the new equipment but lowers her price to ₱0.99 per item, she will increase her business volume. a. What will her new break-even be if she lowers her price? b. What will her monthly profit be if her price reduction results in a monthly volume of 3,800 items? 2. Molly estimates that if she purchases the new equipment and lowers her price to ₱0.99 per item, her volume will increase to about 4,700 units per month. Based on the local market, that is the largest volume she can realistically expect. What should Molly do?
When Molly Lai purchased the Clean Clothes Corner Laundry, she thought that she would automatically
generate good business if she improved the laundry’s physical appearance because it was in a good location
near several high-income neighborhoods. Thus, she initially invested a lot of her cash reserves in remodeling
the exterior and interior of the laundry. However, she just about broke even in the year following her laundry
acquisition, which she didn’t feel was a sufficient return, given how hard she had worked. Molly didn’t realize
that the dry-cleaning business is very competitive. Success is based more on price and quality service, including
quick service, than on the laundry’s appearance.
To improve her service, Molly is considering purchasing new dry-cleaning equipment, including a pressing
machine that could substantially increase the speed at which she can dry-clean clothes and improve their
appearance. The new machinery costs ₱16,200 installed and can clean 40 clothes items per hour (or 320 items
per day). Molly estimates her variable costs to be ₱0.25 per dry-cleaned item, which will not change if she
purchases the new equipment. Her current fixed costs are ₱1,700 per month. She charges customers ₱1.10
per clothing item.
Questions
1. Molly believes that if she doesn’t buy the new equipment but lowers her price to ₱0.99 per item, she will
increase her business volume.
a. What will her new break-even be if she lowers her price?
b. What will her monthly profit be if her price reduction results in a monthly volume of 3,800 items?
2. Molly estimates that if she purchases the new equipment and lowers her price to ₱0.99 per item, her
volume will increase to about 4,700 units per month. Based on the local market, that is the largest volume
she can realistically expect. What should Molly do?
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