Quiz+ | Quiz 6: The Link Between Operations and Finance

Q 1

(Crazy Cab) Crazy Cab is a small taxi cab company operating in a large metropolitan area. The company operates 20 cabs. Each cab is worth about $20k. The metropolitan area also requires that each cab carry a medallion (a type of license). Medallions are currently traded at $50k. Cab drivers make $8 per hour and are available for every time of the day. The average cab is used for 40 trips per day. The average trip is three miles in length. Passengers have to pay $2 as a fixed fee and $2 per mile they are transported. Fuel and other costs, such as maintenance, are $0.20 per mile. The cab drives about 40 percent of the distance without a paying passenger in it (e.g. returning from a drop-off location, picking up a passenger, etc.) a. Draw an ROIC tree for the cab company. b. Populate the tree with numbers. Make assumptions to explore operational variables in as much detail as possible (e.g., assumptions about gas prices, gas consumption, etc.). c. Which of the variables would you classify as operational value drivers d. Analyze the labor efficiency and the efficiency of using the fleet of cabs using productivity ratios.

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Q 2

(Penne Pesto) Penne Pesto is a small restaurant in the financial district of San Francisco. Customers order from a variety of pasta dishes. The restaurant has 50 seats and is always full during the four hours in the evening. It is not possible to make reservations at Penne; most guests show up spontaneously on their way home from work. If there is no available seat, guests simply move on to another place. On average, a guest spends 50 minutes in the restaurant, which includes 5 minutes until the guest is seated and the waiter has taken the order, an additional 10 minutes until the food is served, 30 minutes to eat, and 5 minutes to handle the check-out (including waiting for the check, paying, and leaving). It takes the restaurant another 10 minutes to clean the table and have it be ready for the next guests (of which there are always plenty). The average guest leaves $20 at Penne, including food, drink, and tip (all tips are collected by the restaurant, employees get a fixed salary). The restaurant has 10 waiters and 10 kitchen employees, each earning $90 per evening (including any preparation, the 4 hours the restaurant is open, and clean-up). The average order costs $5.50 in materials, including $4.50 for the food and $1 for the average drink. In addition to labor costs, fixed costs for the restaurant include $500 per day of rent and $500 per day for other overhead costs. The restaurant is open 365 days in the year and is full to the last seat even on weekends and holidays. There is about $200,000 of capital tied up in the restaurant, largely consisting of furniture, decoration, and equipment. a. How many guests will the restaurant serve in one evening b. What is the Return on Invested Capital for the owner of the restaurant c. Assume that you could improve the productivity of the kitchen employees and free up one person who would be helping to clean up the table. This would reduce the clean-up to 5 minutes instead of 10 minutes. What would be the new ROIC d. What would be the new ROIC if overhead charges could be reduced by $100 per day

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Essay

The Return-On-Invested Capital (ROIC) for a capital investment scenario can be defined as the following expression: Where, the 'return' is to be computed by deducting all the expenses from the sales for a given period which is generally taken as one year. a. Use Little's law to compute the flow rate where the Work-In-Process (WIP) and Flow time is known. In this case, the WIP is the number of seats available which is 50. The flow time is the overall time spent per customer in the restaurant. This includes the 50 minutes of waiting, food serving, eating, and checking-out time plus the 10 minutes of cleaning activity i.e. a total of 60 minutes. So, from the Little's law: So, Since the working time for the restaurant in a typical evening is 4 hours, the number of customers served in an evening b. Compute the sales per evening by multiplying the number of customers served per evening by the average payment by a customer. So, The cost per evening includes the wages, material cost, rent, and overhead. The rent and overhead cost per day are both $500 So, It is given that the capital invested is $200,000. So, So, the ROIC is c. The cleaning time reduces from 10 minutes to 5 minutes leading to reduction of flow time from 60 minutes to 55 minutes. So, from the Little's law: Since the working time for the restaurant in a typical evening is 4 hours, the number of customers served in an evening So, Other costs remaining the same, the material cost will be as follows: So, the ROIC is d. Keeping all other parameters the same, the overhead changes from $500 to $400 per day (the reduction is $100 per day). So, So, So, the ROIC is

Q 3

(Philly Air) PhillyAir Inc. offers low cost air travel between Philadelphia and Atlantic City. Philly Air's invested capital is $5,000,000, corresponding to the investment in the two planes the company owns. Each of the two planes can carry 50 passengers. Each plane does 12 daily trips from Philadelphia to Atlantic City and 12 from Atlantic City to Philadelphia. The price is $100 for each one-way ticket. The current load factor is 70 percent (ie., 35 seats are sold on the average flight). The annual cost of operating the service and running the business is $60,000,000 (including all costs, such as labor, fuel, marketing, gate fees, landing fees, maintenance, etc). The company operates 365 days a year. a. Draw an ROIC (return on invested capital) tree for the company that incorporates all of the above information. b. What is the current ROIC c. What is the minimum load factor at which the company breaks even d. What load factor would the company have to achieve so that it obtained a 10 percentage-point increase in the ROIC (e.g. an ROIC increasing from 5 percent to 15 percent)

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Essay

The Return-On-Invested Capital (ROIC) for a capital investment scenario can be defined as the following expression: Where, the 'return' is to be computed by deducting all the expenses from the sales for a given period which is generally taken as one year. a. Construct the ROIC tree for the company considering all the information given as follows: b. Compute the ROIC as follows: It is given that the capital invested is $5,000,000. So, So, the ROIC is c. In order for breaking even, equate the return to zero and compute the value of an unknown load factor L. Equating the above expression to zero gives: So, for the breakeven, the load factor has to be d. Let the load factor be L for which the ROIC will plummet from 26.40% to 36.40%. It is given that the capital invested is $5,000,000. So, Equate the above expression to 36.40% or 0.364 and compute the value of L. So, the load factor required for elevating the ROIC by 10 percent point will be

Q 4

(Oscar's Office Building) Oscar is considering getting into the real estate business. He's looking at buying an existing office building for $1.8 million in cash. He wants to estimate what his return on invested capital (ROIC) will be on an annual basis. The building has 14,000 square feet of rentable space. He'd like to set the rent at $4.00 per square foot per month. However, he knows that demand depends on price. He estimates that the percentage of the building he can fill roughly follows the equation: So, at $4.00, Oscar thinks he can fill about 80 percent of the office space. Oscar considers two categories of costs: variable costs, which are a function of the square feet occupied, and fixed costs. Fixed costs will be $8,000 per month and include such items as insurance, maintenance, and security. Variable costs cover such things as electricity and heat and run $1.25 per month for each square foot occupied. a. Draw an ROIC (return on invested capital) tree for the company. b. What is the ROIC c. What would be the new ROIC be if Oscar decides to charge rent of $5.00 per square foot per month

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Q 5

(OPIM Bus Inc.) OPIM Bus Inc. offers low-cost bus transportation between Philadelphia and Bryn Mawr. The invested capital is $500,000, corresponding to the investment in the two vehicles it owns. Each of the two buses can carry 50 passengers. Each bus does 12 daily trips from Philadelphia to Bryn Mawr and 12 from Bryn Mawr to Philadelphia. The price is $10 for each one-way ticket. The current load factor is 70 percent (i.e., 35 seats are sold on average). The annual cost of operating the service and running the business is $6 million. The company operates 365 days a year. a. Draw an ROIC (return on invested capital) tree for the company. b. What is the current ROIC c. What is the minimum load factor at which the company breaks even d. What load factor would the company have to achieve so that it obtained a 10 percentage-point increase in the ROIC (e.g. an ROIC increasing from 5 percent to 15 percent)

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Quiz 6: The Link Between Operations and Finance

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