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 Week 1 Assignments 

There are two requirements this week: an analysis assignment and a discussion of what was learned in that assignment. .

  1.   Complete the Bicycle Case assignment, using EXCEL for your calculations, then  post the excel file  in the  assignment folder.
  2. Discuss what you learned from the Bicycle case and post your contributions in the  discussion topic: “Bicycle Case Learning”

Guidance

*************

Management Decisions

Managers make decisions all the time.

  • Some decisions are about people; e.g., recruiting, hiring, training, promoting, performance review, layoffs, firing.
  • Some decisions are about products; e.g., marketing, product promotion, advertising, expanding product distribution to new regions or new countries, introducing new products, rejuvenating old products.
  • Some decisions are about strategy; e.g., outsourcing, or make or buy, or plant expansion, or plant closing, or adding a shift.
  • Some decisions are about finance; e.g., issue stock or borrow, increase or decrease the dividend, hedge against foreign currency fluctuations, change the credit terms, reduce risk through derivatives.
  • Some decisions are about organization; e.g., should we stay organized by functions like Marketing, Production, Human Relations, Finance, etc., or switch to organization by product lines, or by geography, or to a matrix organization? Should we establish cross-functional teams?

What all these decisions have in common is that they all need the costs and benefits of various alternatives to be defined, estimated and compared. Then the best alternative needs to be selected and implemented.

And cost-benefit comparison is done by using economic analysis. Economic analysis is basically the method of making cost-benefit evaluations in order to assist decision-makers in choosing the best alternative. Choosing the best alternative is a management decision. That is the connection between management and economic analysis.

Bicycle Case

 

Understanding the effects of pricing on revenues, costs and pricing

  1. (30 points):  Analysis of Pricing: You manage The Really Annoying Bicycle Messenger Company   which makes deliveries for lawyers, consultants, accountants, and lobbyists in the much of Washington DC including Georgetown.   The company makes deliveries of documents and small packages at a price of $10.00 each.  The average number of deliveries in one month is 31,000. The owners of the Really Annoying Bicycle Co.  would like to increase its sales and profits.  They know that, if price is lowered, they will generate more deliveries.   So they run an experiment.  Price is lowered to $9.00 per delivery in May and the number of deliveries   increases to 33,000.
    1. What is the Price Elasticity of Demand?
    2. Is elasticity elastic, inelastic or neither?
    3. What does this mean and why does it matter?
    4. Will Revenues increase or decrease as a result of the price cut? By How much?
    5. Beatrice has calculated the fixed costs for the Really Annoying are $15,000 per month and each bicycle messenger receives $5.50 per delivery.  Will profits go up or down as a result of the price cut?  By How much?
    6. Profits are revenue minus all costs.

 

  1. (30 points): Shaun  suggests that there wasn’t enough time in the experiment.  He estimates that in the second month, June, the Really Annoying Company will have 36,000 deliveries at $9.00.  Please answer the following assuming that Shaun  is correct.  You want to get an idea of what will happen to profits before you commit to an action. If profits go up assuming that Shaun is correct, then you will keep the current price of $9.00 during June. If the profits go down, you plan to return to $10 per delivery.
    1. What would be the Price Elasticity of Demand if Shaun is correct?
    2. Is elasticity elastic, inelastic or neither?
    3. What does this mean and why does it matter?
    4. Will Revenues increase or decrease as a result of the price cut to $9.00 at 36,000 deliveries?  By How much?
    5. Beatrice has calculated the fixed costs for the Really Annoying are $15,000 per month and each delivery costs $5.50.  Will profits go up or down as a result of the price cut if Really Annoying has 36,000 deliveries?  By How much?

 

  1. (40 points): The Really Annoying owners see the change in profits from the price decrease in May and the projection for June.  They decide to go back to a price of $10.00 and have 31,000 deliveries in June.  They decide that they are only willing to manage enough bicycle messengers to support 31,000 deliveries at a price of $10.00.  However, if they raised price to $11.00 per delivery, they would be willing to hire and manage enough messengers to make 45,000 deliveries in July.
    1. Calculate the Elasticity of Supply.  Is it elastic or inelastic?
    2. How many deliveries will Really Annoying have at a price of $11.00?  Hint: you can only sell what customers will buy.  Use the original the elasticity of demand calculated in 1 above.
    3. What will be the Revenue?
    4. What will be the Profit?
    5. Should Really Annoying Bicycle Messenger Company raise the price to $11.00? Why or why not?

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