Chapter 3—Measuring Performance in Operations

6. A family rents videos from a local video store. On average, they spend $80.00 a month. The store's contribution margin is 45 percent and the average customer defection is 40 percent. Determine the value of a loyal customer.

7. A guest at Raphael's Italian Restaurant generally spends $150.00 on a meal. Most of Raphael's customers are local and eat at the restaurant twice a month. If the restaurant's margins are 60 percent, and a loyal customer is estimated to be worth $3000, determine the average defection rate.

8. A retail store sells a popular cosmetic called Devine and the store manager was given $100,000 by the corporate office to improve store performance any way she thinks best. The "base case" information is a price of $30 per bottle, a contribution margin of 0.50, a customer defection rate of 17%, and a repurchase frequency of 3 times a year. If these improvement funds could be used to either increase the contribution margin to 0.58 or reduce the customer defection rate to 15% or increase the repurchase frequency to 4 times per year, what is the best way to spend these funds? (Assume all other variables remain at the base case level for each improvement option.)

You may want to use the table below to help organize your computations and answer.

Price	Contribution Margin	Repurchase Frequency	Defection Rate	VLV in $
$30	0.50	3	17%	$264.69
$30	0.58	3	17%	$307.00
$30	0.50	3	15%	$300.00
$30	0.50	4	17%	$352.92

Note: BLC is 1/.17 = 5.882 years and 1/.15 = 6.67 years.

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9. A manufacturer of paint has two factories located in France and Spain and due to economic conditions must close one of them. The factory productivity data is as follows:

	Gallons of Paint	Resource Cost
	Produced (in 1,000s)	per Gallon
Factory (France)	4,600	$4.25
Factory (Spain)	3,900	$4.00

10. A retail store sells a popular cosmetic called Devine and the store manager was given $300,000 by the corporate office to improve store performance any way she thinks best. The "base case" information is a price of $30 per bottle, a contribution margin of 0.50, a customer defection rate of 20%, and a repurchase frequency of 3 times a year. If these improvement funds could be used to either (a) increase the contribution margin to 0.60 or (b) reduce the customer defection rate to 12% or (c) increase the repurchase frequency to 4 times per year, what is the best way to spend these improvement funds? (Assume all other variables remain at the base case level for each of the three improvement options.) VLC = P*CM*RF*BLC

a. What is the value of a loyal customer (VLC) for improvement option (a)?

b. What is the best way to use the $300,000 in improvement funds?

11. Consider the following information.

	First Quarter	Second Quarter
Unit Selling Price	$15.00	$17.00
Total Units Sold	12,000	11,500
Labor Hours	10,000	9,500
Labor Cost/Hour	$8.00	$8.00
Material Usage (lbs.)	6,000	5,500
Material Cost/lb.	$12.00	$11.50
Other Costs	$25,000	$23,000

a. Which quarter, First or Second, had the higher labor productivity (output quantity per labor dollar input)?

b. Which quarter, First or Second, had the higher material productivity (output quantity per material dollar input)?

c. Which quarter, First or Second, had the higher total productivity (dollar output per total dollar input)?

12. A coffee shop's average transaction price is $3, the contribution margin is 60 percent, the typical customer makes a purchase once a week or 52 weeks per year, and management estimates the value of a loyal customer over the buying life cycle as $520. What is the customer defection rate?