Solutions to End of Chapter Problems 5

Matching Supply with Demand: An Introduction to Operations Management Solutions to End-of-Chapter Problems (last revised February 25, 2008; make sure to visit www.cachon-terwiesch.net for the latest updates, excel files, ppt files and other information)

Chapter 5 5.1. Crazy Cab a. see tree below b. see tree below c. Value drivers include the % of distance driven empty, the number of trips per day, and the distance of the trip. This is a high fix cost business with lots of capital, thus the more revenue you can squeeze out of the cabs, the more money you make. And interesting issue would be to see if by reducing the time the cab drives empty, one could increase the number of trips further d. Similar to the airline ratios discussed previously. We can look at labor efficiency as: Revenue/ labor cost = Revenue / mile * miles/trip * trips / day * days/ labor cost

Revenue $2.336M

Price per trip

Price per mile: $2 Fixed fee: $2 Distance: 3 miles

# of trips Margin $689k

# of cabs: 20 Labor Cost: 20 drivers * 24hours * 8$/hour Cost $1.4M (labor) +$245k (fuel)

Return on Invested Capital 49%

Trips per cab: 40

Working capital Invested Capital $1.4M

Distance Fuel and Maintenance: total distance

$0.20 per mile

No information given in question; relatively small

Number of cabs: 20 Fixed capital

Cab: $20k Capital per cab

Medaillon: $50K

The first ratio is the pricing power, the second the length of a trip, the third how many trips we get out of a cab, and the fourth is a measure of wage rates.

Q5.2. Penne Pesto a. The restaurant will serve 200 guests on an evening b. The ROIC is 18.25% (based on $100 net profit per day) c. Making the clean-up faster allows to turn over the table quicker and leads to an increase in the number of guests served. We get 218 guests served and a 66% ROIC d. A reduction in OH cost has a less dramatic effect. New ROIC would be 36.5%