Saturday, November 8, 2008

Operations Management - Capacity Planning

Internet Case Study for Supplement 7: Capacity Planning
Southwestern University’s Food Service

Southwestern University (SWU), located 30 miles southwest of the Dallas/Fort Worth metroplex, has witnessed tremendous growth in its football program (see Southwestern University: A, in Chapter 4). With that growth, fueled by the hiring of legendary coach Bo Pitterno, has come more fame, the need for a bigger stadium, and more complaints about seating, parking, long lines, and concession stand prices (see Southwestern University: C, in Chapter 6). Southwestern University’s president, Dr. Joel Wisner, was not only concerned about the cost of expanding the existing stadium versus building a new stadium, but also about the ancillary activities. He wants to be sure that these various support activities generate revenue adequate to pay for themselves. Consequently, he wants the parking lots, game programs, and food service to all be handled as profit centers. At a recent meeting discussing the new stadium, Wisner told the stadium manager, Hank Maddux, to develop a break-even chart and related data for each of the centers. He instructed Maddux to have the food service area break-even report ready for the next meeting. After discussion with other facility managers and his subordinates, Maddux developed the table below. This table shows the expected percent of revenue by item, the suggested selling prices, and his estimate of variable costs.

Item Selling
Price/Unit
Variable
Cost/Unit
Percent
Revenue
Soft drink$1.50 $ .75 25%
Coffee 2.00 .5025%
Hot dogs2.00.8020%
Hamburgers2.501.00 20%
Misc. snacks 1.00 .4010%

Maddux’s fixed costs are interesting. He estimated that the prorated portion of the stadium cost would be: salaries for food services at $100,000 ($20,000 for each of the five home games); 2,400 square feet of stadium space at $2 per square foot per game; and six people in each of the six booths for 5 hours at $7 an hour.

Maddux wants to be sure that he has a number of things for President Wisner: (1) break-even point in dollars for all food sales; (2) realistic sales estimates (for instance, he wants to know how many dollars each attendee is spending on food at his projected break-even if attendance grows to 70,000); (3) what sales per attendee would be if attendance remained about 27,000; and (4) what his unit sales would be at break-even, that is, what are his sales of soft drinks, coffee, hot dogs, and hamburgers. He felt this latter information would be helpful to understand how realistic the assumptions of his model are. He also wanted to be prepared for any questions that Dr. Wisner and others might bring up at the next meeting.

DISCUSSION QUESTION

Prepare the report with the items noted so it is ready for Dr. Wisner at the next meeting.

3 comments:

Andy said...

1.)
soft drinks-100000/1-(.75/1.5)=$99999.5
coffee-100000/1-(.5/2)=$99999.75
hot dogs-100000/1-(.8/2)=$99999.6
hamburgers-100000/1-(1/2.5)=$99999.6
misc.snacks-100000/1-(.4/1)=$99999.6
2.)
99999.5+99999.75+99999.6+99999.6+99999.6=499998.05/700000=$.71
3.)499998.05/27000=$18.52
4.)soft drinks-100000/1.5-.75=133333.3 units
coffee-100000/2-.5=66666.6 units
hot dogs-100000/2-.8=83333 units
hamburgers-100000/2.5-1=66666.6 units
misc. snacks-100000/1-.4=166666.6 units

Tyler said...

1. Soft drinks- 100000/1-(.75/1.5)= $99,999.5
Coffee- 100000/1-(.5/2.00)=$99,999.75
Hot Dogs-100000/1-(.8/2.00)= $99,999.6
Burgers- 100000/1-(1/2.5)=$99,999.6
Misc Snacks- 100000/1-(.4/1.00)=$99,999.6

2. $499,998.05/ 70,000= $7.14 per person
3. 499,998.05/ 27,000= $18.5 per person

4. Soft drinks- 100000/1.5-.75= 133333.33 units
Coffee-100000/2-.5= 66666.66 units
Hot Dogs-100000/2-.8= 83333.33 units
Burgers- 100000/2.5-1= 66666.66 units
Misc Snacks- 100000/1-.4= 166666.66 units

One thing I would do if I was Maddux is to look over these numbers and examine them to make sure everything is hopefully going to work out. I would also try and find anything that Dr. Wisner might have a question on and try to develop an answer that way I would hopefully be prepared for it before he would ask it.

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