The Palms Dry Cleaning Shop in Fort Lauderdale, Florida, faces a highly seasonal demand for its services, as the snow-birds retirees flock to Florida in mid-fall to enjoy the mild winter weather and then return to their main homes in mid-spring. Given this seasonality, Palms tries to keep the overhead costs as low as possible and therefore, often uses seasonal contracted labor to man its operations. The following table shows the labor costs in each month of operation over the past 12 months as well as the total number of garments that were dry-cleaned in each month. Palms pays fixed wages per hour to each employee, and we can assume that the costs of other variable inputs (such as chemicals, electricity, etc) have remained constant.
|
Month
|
TVC ($)
|
Garments cleaned
|
|
June
July
August
September
October
November
December
January
February
March
April
May
|
35,490
42,470
48,980
52,530
37,480
33,510
31,850
27,860
22,160
19,520
25,960
32,980
|
4,500
5,575
6,300
6,525
5,325
4,050
2,850
2,450
1,525
925
1,925
3,500
|
a. Derive average variable cost (AVC) data from the data in this table.
b. Use gradient analysis to provide an estimate of eleven data points that seem to represent the MC curve over this range of outputs. Plot these data points and sketch in estimated MC and AVC curves that seem to best fit these data points.
c. Suppose that demand is estimated to move from its present (May) level of 3,500 units to 4,000 units next month (June). What is the incremental cost of meeting this demand?
d. Assuming that Palm's price to dry clean a garment has been constant at $15 over the past year, and will remain at that level, what contribution to overheads and profit can it expect in June?