INTRODUCTION TO BUSINESS ADMINISTRATION

PRODUCTION CONTROL EXERCISES

1. A hotel has 75 rooms and their price is €80 per night. The hotel’s fixed costs are €2,500
per day and daily variable costs are equal to €30N, where N is the number of booked
rooms. What occupancy rate corresponds to the hotel’s break-even point?

2. You are managing a clothing store that has the following costs:

Rent: €800 per month.

Electricity: €500 per month.
Salary expenses: €5,000 per month.
Other expenses: €1,000 per month

To simplify, suppose that you only sell one product, that we will call the “average
product”. You buy each unit of this product at a price of €20 and you sell it at a price of
€35. You estimate that 60 percent of the clients who visit your store do not purchase
anything and 40 percent purchase the equivalent to one unit of the average product.
a) Within a month, how many clients should visit the store in order to achieve the
break-even point?
b) What is the degree of operating leverage if you receive 2,000 visitors per month?
c) If rent increases to €1,000, how will the break-even point and degree of operating
leverage change? For the degree of operating leverage, assume that you receive
2,000 visits per month.

3. An airline has a fixed cost equal to €500 million. Average variable cost is €0.20 per
kilometer and passenger.
a) Suppose this company’s flights have an average distance of 2,000 km. If price
per kilometer and passenger is €0.45, what is this company’s break-even point?
b) Suppose this airline decides to concentrate on long-distance flights, so that
average distance is now 5,000 km. If price per kilometer and passenger is still
€0.45, what will be the break-even point?

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 c) Compare the results of the previous two questions and explain the difference.

4. A supplier of enamel sends a seller to our supermarket on the last day of each month,
so that we order the quantity we want. The day before we check the level of inventory
and we determine how many kilograms we need for the following month. Knowing
that we expect annual sales of 1,500 kg and that the purchase cost is €25, the ordering
cost is €100 and the annual holding cost is €8 per kilogram:

a) Calculate the total annual cost of inventory with the monthly frequency
proposed by the supplier.
b) Suppose the date of renewal of the contract is approaching and we want to tell
the supplier how frequently we would like the seller to come. Calculate this
frequency and calculate the total annual cost of inventory in that case.

5. A company manufactures traffic signals. Its main input are metal sheets, which are
purchased at a price of €5 per squared meter. In 2018 the company used 800 m 2 of
sheet but for 2019 there is a predicted fall in demand and it estimates that it will only
need 600 m2. The ordering cost is €75 and the storage cost is €10 per m 2. We also
know that the average cost of debt is 9.3 percent for this company.

a) Calculate the optimal order quantity for 2019 and the duration of the
replenishment period.
b) Compare this order quantity with the quantity that the firm used in 2018,
assuming that in that year it minimized the cost of inventory.
c) If the company did not change the order quantity, what would be the cost of
this error?

6. A computer supplies store would like to improve its inventory management of printer
cartridges. Throughout the year this store sells 6,000 units and it pays €15 to its
supplier for each of these units. The ordering cost is €20, the unit storage cost is €0.50
and the cost of capital is 10 percent.

a) Calculate the optimal order quantity.

b) Calculate how many orders it should place in a given year and the duration of
the replenishment cycle, assuming that the firm operates 300 days per year.

7. You are going to open an event planning business for large companies. The price of
each event will be €4,000 and you estimate that you will organize N events per year.
Salary expenses will amount to €180,000 per year, rent will be equal to €10,000 and

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 company vehicles will have an estimated cost of €21,000. You plan to use materials
worth €800 per event and other variable costs are estimated at €400 per event.

a) Calculate the break-even point of this business.

b) Calculate the degree of operating leverage assuming that the company sells 100
events per year, and interpret the economic meaning of the result.
c) If you reduce the price by 20 percent you estimate that the number of events
will increase by 50 percent. What would be the degree of operating leverage in
that case?

8. A hotel would like to improve its inventory management of bath supplies. The main
article that the hotel purchases is a kit that includes soap, tooth brush, tooth paste,
shampoo, conditioner, and moisturizer. The hotel predicts that during the year it will
purchase 25,000 units and the price that it pays to the supplier is equal to €5. Ordering
cost is €30 per order, unit storage cost is €1 and the cost of capital is 9 percent.
a) Calculate the optimal order quantity.
b) Calculate the number of order that it should place during the year and the
duration of the replenishment cycle, assuming that the hotel operates 365 days
per year.

9. A hotel purchases towels to a supplier with a frequency that has been calculated to
minimize the cost of inventory. If the supplier decides to reduce the prive of the
towels, should the hotel increase or reduce the order quantity? Explain your answer.

10. “In a hotel, the break-even point should never correspond to a 100-percent occupancy
rate.” True or false? Explain.