Elaborate On The Memo Addressing Management's Concerns

Elaborate on the memo addressing management's concerns

Janice Wilton has been asked to clarify and expand upon her analysis regarding extending the store hours of 21st Century Liquors. This entails addressing the specific managerial concerns raised by Ted Radcliff, the general manager. The key issues include understanding the concept of marginal costs and revenues in the context of extending hours, evaluating the appropriateness of using average purchase values, and assessing the potential impact of late-hour customers arriving earlier if hours are shortened. This detailed elaboration should incorporate relevant management accounting, microeconomic principles, and statistical insights to support decision-making.

Paper For Above instruction

In response to the management team's inquiries, this paper offers a comprehensive explanation of the economic and financial rationale underpinning the recommendation to extend the operating hours of 21st Century Liquors until 4:00 a.m. The analysis integrates concepts from management accounting, microeconomics, and statistics to address the concerns regarding marginal costs, average purchase values, and customer behavior modifications upon changing store hours.

Understanding Marginal Revenue and Marginal Cost in Store Hour Extension

First, the concept of marginal revenue (MR) and marginal cost (MC) is foundational to evaluating whether extending store hours will be profitable. Marginal revenue in this context refers to the additional income generated from selling one more unit of product, or in this case, from the additional hours of store operation. Given the detailed analysis by Shawna, the contribution margin per customer is estimated at approximately $7.00, which already accounts for the alcohol purchase cost but excludes additional store operating costs.

Manufacturing and management accounting principles dictate that a profit-maximizing decision involves comparing marginal revenue with marginal cost. When MR exceeds MC, extending hours will likely increase overall profits; conversely, if MC exceeds MR, the extension could diminish profitability. In this scenario, the marginal revenue, calculated as $7.00 per customer times the average of five customers per hour during the late night period, amounts to approximately $35.00 per hour. The associated increase in costs primarily includes wages payable at overtime rates of $15 per hour for each of the two clerks, totaling $30 per hour. Therefore, the marginal cost of extending hours by one additional hour is roughly $30, which is less than the MR of $35, indicating profitability from such an extension.

This margin analysis aligns with microeconomic principles asserting that an activity is beneficial if the incremental revenue outweighs the incremental costs. Importantly, this calculation assumes no significant additional fixed or variable costs besides wages, which is consistent with Shawna’s initial assessment that overhead expenses are negligible. Also, the security upgrades involving a one-time $21,000 investment are excluded from immediate marginal costs since they are long-term capital expenses, depreciated over seven years.

Justification for Using Average Purchase Values

Second, regarding the use of average purchase amounts—the $29 average purchase—this approach simplifies the analysis and provides a stable estimate of customer contribution. Shawna's detailed sampling, which showed a typical purchase size of approximately $29, regardless of the time of day, offers a reasonable basis for estimating marginal revenues across the different hours. While the data suggests that evening customers tend to purchase slightly more, the variability observed was not significant enough to warrant separate calculations for day versus evening consumers in the marginal analysis.

From a statistical standpoint, assuming a uniform purchase value simplifies the analysis without substantially compromising accuracy, especially given the relatively small variance in individual purchase amounts. This approach aligns with management accounting practices where simplifying assumptions are made to facilitate decision-making, provided they do not significantly distort outcomes. If further precision is desired, statistical techniques such as confidence intervals could be applied to validate the stability of the average purchase figure.

Customer Behavior and Potential Shift in Arrival Times

Third, the concern that extending store hours might influence customer arrival patterns—namely, that some customers arriving late could have come earlier if the store closed earlier—is a critical behavioral factor. Shawna’s experimental data, which extended store hours incrementally and monitored hourly customer counts, offers insights into whether late-night patrons are substitutes or additions to earlier customers.

The data reveal that during the late-night testing hours, customers persisted at a consistent rate until the extended closing time, indicating a degree of substitution rather than an entirely new influx of customers. If the late-night customers are primarily late arrivals of regular patrons, then extending hours may not significantly increase total customer volume but rather shift the timing. Conversely, if the additional hours attract new customers, the total customer count—and consequently revenue—would rise more substantially.

From a microeconomic perspective, understanding this substitution effect is essential. If late-hour guests are simply delaying their visits, increasing late-night hours might not increase total sales, but if the extension attracts new patrons, the incremental revenue potential justifies the additional costs. Shawna’s experimentation suggests that there is a consistent customer flow during extended hours, supporting the argument that extending hours would generate additional sales rather than merely shifting existing demand.

Implications of Customer Shift on Profitability

Understanding customer shift behavior directly influences the profitability analysis. If customers who would have visited earlier decide to wait until the later hours, then total sales and profit margins stay relatively stable. However, if new customers are attracted by the extended hours, and their purchase contribution aligns with the average estimated at $29, this significantly enhances profitability.

Furthermore, considering the security and staffing investments, if these capital expenditures and operational costs are spreading over an expected seven-year lifespan and additional hours lead to increased revenue, the long-term profit impact becomes favorable. Calculating depreciation and amortization, based on the $21,000 security upgrade, yields annual costs, which need to be incorporated into the overall profitability model. This capital investment, depreciated straight-line over seven years, adds approximately $3,000 per year to fixed costs, slightly diminishing short-term gains but supporting long-term profitability.

Conclusion and Strategic Recommendation

In conclusion, integrating management accounting and microeconomic principles with empirical data suggests that extending store hours to 4:00 a.m. would be financially advantageous under current assumptions. The marginal revenue from late-night customers exceeds the marginal costs associated with additional wages and security investments. The use of average purchase size is justified by the data's stability, and the analysis of customer behavior indicates that late-hour visitors are not merely delayed patrons but potential new customers, increasing total sales.

Therefore, my recommendation aligns with Janice Wilton’s initial proposal: extending hours to 4:00 a.m. would likely increase profits by roughly $40,000 annually, even after accounting for capital expenditures and increased labor costs. Continuous monitoring should be implemented to ensure actual customer usage aligns with the projected patterns, enabling ongoing adjustments to operational hours and staffing strategies.

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