Matching Supply with Demand: An Introduction to Operations Management
3rd Edition
Questions for Chapter 6
Last updated March 26, 2012
Copyright Gerard Cachon and Christian Terwiesch: Instructors adopting our text are free
to use these questions.
QUESTIONS WITH EMBEDDED ANSWERS
Full Limo Inc
Full Limo Inc. offers high-end transportation services between the King of Prussia Mall (KPM) and
Center City Philadelphia (22.5 miles). The invested capital is $800,000, corresponding to the
investment in the 4 luxury vans it owns (you can ignore all other invested capital). Each van can
carry 10 passengers. Each van makes 12 daily trips from Philadelphia to KPM and 12 from KPM
to Philadelphia. The company charges $10 for each one-way ride. The current load factor is 40%
(that is, each ride has 4 passengers on average). A significant source of operating costs is the fuel
cost. The company vans have a fuel economy of each of 20 mpg (miles/gallon). Current fuel
prices are 2.629 $/gallon. The staff costs and other costs of operating the service and running
the business are $1M per year. The company operates 365 days a year.
a) Draw an ROIC (return on invested capital) tree for the company.
b) What is the ROIC?
c) Assume that the company can increase the fuel efficiency of the vans to 25mpg. What
would be the new ROIC?
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Five Seasons Hotel
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Five Seasons Hotel is a chain with 10 hotels. Strategically, the chain implements a
cookie-cutter approach to building and running its hotels, in that all hotels are practically
identical. Five Seasons invested $150 million in acquiring the land for all hotels and
$500 million in building and furnishing the 10 hotels to a guest-ready stage. Each hotel
has 150 rooms. Each room has a rack rate of $200 per night but the hotel gives an
average of discount of $30 per night off this base price. Each hotel costs $1 million in
materials to run, and is staffed by 58 employees, each paid an average compensation of
$50,000 a year. This staffing level implies a certain service level, which together with the
rack rate and discount, determines the chain’s average occupancy rate—the percent of
available rooms sold—in this approximate way:
Chain-wide average occupancy rate = 0.01numberOfEmployeesPerHotel
( 0.0015 base Price ) + ( 0.01 discount),
subject to a maximum of 100% and minimum of 0% (base Price and discount are
expressed in [$]). The company operates 365 nights a year.
a) What is the ROIC?
b) Reducing the number of employees reduces staffing costs, but it also reduces the
occupancy rate when service level drops. What is the ROIC if Five Seasons reduces the
number of employees to 50 per hotel?
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