When Molly Lai purchased the Clean Clothes Corner Laundry, she
thought that because it was in a good location near several
high-income neighborhoods, she would automatically generate good
business if she improved the laundry’s physical appearance. 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 acquisition of the laundry, 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 and that success is based more on price and quality
service, including quickness of service, than on the laundry’s
appearance. In order 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 item dry-cleaned, which will not change if she purchases the
new equipment. Her current fixed costs are $1 ,700 per month. She
charges customers $1 .1 0 per clothing item. A. What is Molly’s
current monthly volume? B. If Molly purchases the new equipment,
how many additional items will she have to dry-clean each month to
break even? C. Molly estimates that with the new equipment she can
increase her volume to 4,300 items per month. What monthly profit
would she realize with that level of business during the next 3
years? After 3 years? D. 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. If she lowers her price, what will
her new break-even volume be? If her price reduction results in a
monthly volume of 3,800 items, what will her monthly profit be? E.
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?
