Making Decisions With a Linear Profit Model How much is the business paying out versus how much it is taking in?

Making Decisions With a Linear Profit Model

How much is the business paying out versus how much it is taking in? When approaching decisions from a linear profit model, the total costs of your expenses versus the profit you bring in helps decision makers determine the viability of potential options. Think about your personal budget: If you make x amount of money from your job (your “take in”) and you want to add a new or different expense into your finances (what you “pay out”), a linear profit model can help calculate the feasibility of this option.

To prepare for this Assignment, consider how calculations are an essential asset to decision making, especially when using a linear profit model. Think about how a difference in calculation can impact a short-term decision or major change in a business.

For this week’s Assignment, you examine cost behaviors and decision-making scenarios using the linear profit model. You then write 1–2 pages on each, looking at the presented finances and providing recommendations on potential improvements.

Part 1

Baker Consolidated

Baker Consolidated operates a cafeteria for its employees. The operation of the cafeteria requires fixed costs of $4,700 per month and variable costs of 40% of sales. Cafeteria sales are currently averaging $12,000 per month.

Baker has an opportunity to replace the cafeteria with vending machines. Gross customer spending at the vending machines is estimated to be 40% greater than current sales, because the machines are available at all hours. By replacing the cafeteria with vending machines, Baker would receive 16% of gross customer spending and avoid all cafeteria costs. In a poll, employees did not express a preference for one option over the other.

In a 1- to 2-page document, explain the impact of this decision. Be sure to address the following:

• How much does monthly operating income change if Baker Consolidated replaces the cafeteria with vending machines? Explain using linear profit modeling calculations.
• What recommendation would you make for Baker Consolidated’s managers considering this decision? Justify your response.
  • In your recommendation, be sure to calculate how the monthly operating income changes if the company replaces the cafeteria with vending machines.

Part 2

Barnwell Brothers Company

Data for the Barnwell Brothers Company are as follows:

In a 1- to 2-page document, address the following based on the provided company cost data:

• What is the break-even sales in units?
• If Barnwell Brothers is subject to an effective income tax rate of 40%, how many units would Barnwell Brothers have to sell to earn an after-tax profit of $90,000?
• If fixed costs increase $31,500 with no other cost or revenue factors changing, what is the break-even sales in units?
• How would these calculations affect decision making for managers at Barnwell Brothers? Why?
• What recommendation(s) would you suggest for reducing costs at Barnwell Brothers? Justify your recommendations using linear profit modeling.

Part 3

Vino Bella Cellars

Vino Bella Cellars manufactures a 1,000-bottle wine storage system that maintains optimum temperature (55–57 °F) and humidity (50–80%) for aging wines. The following table depicts how average cost varies with the number of units manufactured and sold (per month):

In a 1- to 2-page document, address the following:

• What is the defined difference between average cost and marginal cost?
• Vino Bella Cellars sells the units for $4,500 each. This price does not vary with the number of units sold. How many units should Vino Bella Cellars manufacture and sell each month?
• Should Vino Bella Cellars charge more for different quantities of units? Why or why not?
• What recommendation would you make to the owners to increase their profits on this product? Explain the role of linear profit modeling within your recommendation.

Submit your 3- to 6-page Assignment by Day 7 of this week.