SUMMARY: Jordan Wright, a General Manager of a major beverage retailer known as Village
Hill Spirits, is determined to find out if it financially makes sense to keep their stores open past
10 P.M., now that legislation allows for the selling of alcohol in retail establishments to 4 A.M.
His Operations Manager, Grace, after conducting several experiments and gathering some data is
convinced staying open late financially makes sense and will earn them a nice profit. However,
Jordan is still not convinced and remains unclear of a few things regarding the data.
This is just a rough draft. – Aram
INTRO: The case of Village Hill Spirits presents itself with Jordan Wright, a General Manager of
a major beverage retailer known as Village Hill Spirits, wondering if it financially makes sense
to extend the stores closing time from 10:00 P.M. to 4:00 A.M. The state legislature in the last
year passed legislation allowing alcohol to be sold in retail establishments until 4:00 A.M. He
wondered how many additional customers the store would get by extending their hours and
would doing so increase profits. Jordan expressed his wonder and questions to his Operations
Manager, Grace Baker, and instructed her to look into the matter for their downtown location and
to give any recommendations. Grace proceeded to ask her accountant, Julie Lam, to provide her
with data pertaining to the revenue and costs for the store, specifically wanting to know the
average purchase per customer and the cost of extending the store hours. Julie decided to sample
a small set of customer invoices to see what they bought. Julie took two random samples of 30
customers each, one sample being the “day customers” (those who made a purchase before 6:00
P.M.), the other being the “night customers” (those who made a purchase after 6:00 P.M.), and
analyzed what they had bought and the cost of the items they purchased. This data is provided in
As the data is being presented, Julie tells Grace of two factors that should be considered when
extending hours. The first being paying the time and a half bonus to the two night salespeople
for any hours after midnight. The second being having to invest in a better security system,
which is estimated to cost approximately $21,000 in construction and rewiring cost.
Additionally, Julie mentions how the improvements will have a life of seven years and will
depreciate assets using the straight-line method and the improvements are expected to have no
salvage value. After some consideration and reviewing of the data collected by Julie, Grace
decides to experiment with different closing times for a two-week period because she felt that the
store wasn’t limited to just two options, 10:00 P.M. and 4:00 A.M. She wanted to know how
many customers came in during each hour of business for each closing time and she did this by
progressively extending the closing time beyond 10:00 P.M. until 4:00 A.M one hour at a time.
The results of her experimentation with hours of operation are summarized in Attachment 2.
When the experiment was finished and all the data was collected, Grace sent her analysis to
Jordan and suggested extending the store hours based on her results. She claims they will
experience a profit of $45,720 per year, before taxes. Jordan thanked Grace for the work she and
Julie had put into the analysis, however he was still unclear about a few things. One, he did not
understand the marginal approach that was used and how there can be two marginal costs (one
for the liquor store and another for the sales clerk). Two, he was confused as to why they used
the average purchase overall hours of operation when the sample suggests that evening
customers purchase at a higher amount. The third and last thing Jordan brought to Grace’s
attention was he wondered if some customers who arrive during the very late hours might arrive
earlier if the store closed earlier. He asked Grace if she can confirm this to be true based on her
experimental data and if that would change her recommendation.
Read and let me know if I need to fix anything, thanks. – Aram
The R value measures the strength and direction of a linear relationship. Our data, r = 0.9352,
suggests a strong and positive linear pattern between purchase costs and purchase revenues (see
Appendix A). The result indicates a very strong relationship between the two variables. The R²
value means 87.45% of the variability of purchase costs is explained by purchase revenues (see
Appendix A). In other words, 87.45% of the regression model fit our observed data. Visually,
there are no outliers along our trendline. These conditions describe a strong correlation between
purchase costs and purchase revenues. Therefore, based on our observed data and regression
model, it is fair to assume the constant contribution margin per customer is accurate and holds
well. In order to calculate the contribution margin, we used the data for all customers and
subtracted the total variable costs from the total revenue. The Contribution Margin (CM) was
calculated to be $550.74 (see Appendix A ). We divided the contribution margin per customer by
the total number of observed customers (60). The final result for contribution margin per
customer is $9.18 (see Appendix A ).
The coefficient on intercept, b0, is 0.0277. Our p-value > 0.05 at approximately 0.983, indicating
no effect was observed (see Appendix A ). To understand the meaning of intercept, we can plug
in a value of 0 into the slope, b1 = 0.733. The intercept is important to calculate predicted values.
y = b0 = 0.0277 which means at $0 purchase revenue, there is a predicted purchase cost of 2.77
cents (see Appendix A ). This means the intercept is the expected mean value of purchase
revenue when x = 0. This scenario makes sense since businesses lose money when no sales are
made. Hence, the intercept is likely an accumulation of internal costs for running the business.
More importantly, although it is a small cost, it would still be considered a fixed cost.
Based on the two-tailed test, we have determined there is a good reason that evening customers
purchase, on average, more than day customers. The statistical test shows a strong correlation
between the variables for both data sets (see Appendix D). For day customers, the mean
purchase revenue is $33.34 and mean purchase cost is $24.25 (see Appendix B). For evening
customers, the mean purchase revenue is $35.52 and mean purchase cost is $26.26 (see
Appendix B). Comparing the differences between the means only, we can determine that
evening customers purchase more on average. We wanted to be sure with our results, so we also
calculated the contribution margin for both types of customers. Day customers had a CM of
$9.09 and evening customers had a CM of $9.27 (see Appendix B). Our final result supports that
evening customers purchase approximately $0.17 more per customer than day customers (see
There is only one marginal cost in this situation. There may seem to be two marginal costs in
Appendix C, but in reality the variables for the cost of each clerk changes when it’s after
midnight since clerks are to be paid time-and-a-half of $14. The difference in Marginal Cost
between 10 P.M – 12 A.M and 1 A.M – 4 A.M. The Gould state law mandates a clerk to be paid
$21 dollars instead of $14 dollars the hour after midnight. Essentially, the $21 dollars comes
from multiplying the mandated time-and-a-half pay of $14. Marginal Cost refers to the change in
Total Cost per Quantity. For example, in attachment 3, since two clerks are only necessary to
operate the business, per hour from 10 P.M to 12 A.M is $14, thus marginal cost for two clerks
per hour is $28. Then, the cost per hour from 1 A.M to 4 A.M is $21, hence the cost for two
clerks per hour is $42 dollars.
Furthermore, we decided on using the average if purchases during overall hours of operation
because we want to figure out the correlation with the variables to be able to figure out the mean
of purchases for the day and evening customers separately. We accomplished this since an
overall purchase from the hours gives us the ability to find a correlation to find out the variables
are strongly related before making a correct analysis. This is then confirmed by revising
Appendix A, from R Square, which tells the variables are correlated. Now we are capable of
finding the mean of purchases by day and evening separately, which is found on Appendix B.
To answer the store owner’s question, thanks to our data in Appendix C, closing the store later
in the night means that more people are willing to show up throughout the time between 10 P.M
through 4 A.M. In the Appendix C, towards the left side, we can see a trend where the store
being opened for more hours allows clients the opportunity to leave their purchases for later
hours. One prime example is between the time of 12 A.M to 1 A.M which loses a potential
customer each time the store decides to close later in the night. The same can be said with the
hour between 1 A.M to 2 A.M which loses customers by the next two following hours. By
allowing the store to close at extremely late hours, it gives the customer the ability to leave their
purchases to a later hour. Thus, giving customers a time restriction or an earlier closing time will
tell some customers to give us their business at an earlier time. This is the best outcome we are
looking for since closing earlier will give the business the best profit outcome.
MAXIMIZING PROFITS (CLOSING TIMES)
According to our calculations, the most profitable closing time for Village Hill Spirits would be 1
AM. (see Appendix C). We observed all the new customers after the hours of 10 PM through 4
AM. With the data obtained, we multiplied the number of customers for each hourly interval by
the contribution margin to obtain the marginal revenue. The Marginal Revenue (MR) is the
change in total revenue that results from each additional hour of operation. We had to account for
labor wages before and after midnight. The additional cost factored in overtime at time and a half
above regular wage. The last part was calculating the added profit by taking the difference
between revenue and cost in that slotted hour. This amount was annualized and charted against
other hours of operation for comparison purposes.
We recommend a closing time of 1 AM. During this closing hour, we noticed a significant boost
in profit at $159.01 per day, or $57244.32 per year, before taxes (see Appendix C). Although
other hours of operation resulted in additional profit over the original closing hours of 10 PM,
the costs were higher, resulting in lower marginal profit. For example, after 10 PM, profits
increased to $29573, $49233, and a high of $57244. After 1AM, there are fewer new customers,
but it is more expensive to operate since the workers are working overtime. The subsequent
annualized profits from 2AM to 4AM are $55342, $53349, and $48233, respectively (see
Appendix C). As indicated by the data, the business continues to maximize profits by extending
hours to 1AM. On the contrary, although the business is still accruing profit after 1 AM, marginal
profit decreases per hour. At these hours, the employees would have worked 17 hours, which is
BREAKEVEN AND SAFETY MARGIN
Breakeven Calculations and Safety Margin:
● Calculate the breakeven number of additional customers for each added hour of operation
up to 4 am.
a. In order to find breakeven in units, we must divide the fixed cost, which in this
case is the mandatory upgrade of the security system of $21,000 every seven
years, by the contribution margin of 9.179 which was found earlier. Since we are
calculating the breakeven number of additional customers for each added hour we
stay open, we multiply by the average number of customers that enter our store.
For the hour of 10PM it would be $21,000 divided by 9.179 while being
multiplied by the 14 customers which comes out to $163.42. The $163.42 is the
amount needed to reach the break even point for staying open until. See
● Calculate the breakeven number of additional customers for an entire year, assuming (i)
closing time of 4 am and then (ii) your recommended closing time if it differs from 4 am.
● Find the safety margin on new customers for the year.
[Hint: For the per-year analysis, remember to account for the cost of the security upgrade.
Use straight-line depreciation as a measure of the fixed cost of the security upgrade, and
then add the cost of overtime labor for the additional hours of business for each of the
360 business days in the year.] (Will add data in Appendix)
Grace’s analysis does not take into account the safety of the worker due to having later
closing times, there could be more criminal activity. Having later hours could lead to more
trouble in the long run because of the uncertainty of nighttime. Grace did not take into account
that upgrading a security system has a significant cost adding to the other expenses (overtime
wage of worker(s)). It is important to implement the cost of upgrading the security system in the
net profitability, when it can confuse the store owner. The store owner has asked for our insight
to decide how to react to the newly instated law on liquor store hours. In my opinion, having the
store open until 4 A.M has added factors that should be mentioned to the store owner within our
next form of communication.
We must take into consideration the fact that having a liquor store open until 4 A.M at
night could give the neighborhood and the society a bad reputation. Since in the late hours lots of
illicit activity can heighten with more access to liquor beverages now being supplied and what it
can attract to the area. Having a liquor store being open all night can lead to unwanted attention
from certain people which can be a safety and security issue causing employees not to feel safe
to come into work. This can also make it so other customers would not want to come to that
liquor store for alcohol and other supplies for consumption or worse, even create a social debate
to return store hours to normal. This would take a toll on the cost of upgrading the security
system and thus become a sunk cost. This can also be a liability issue because if an employee or
a guest would be injured in said criminal activities of the night, it would be on the store owners.
This would become an expensive liability to the store owner since we want the security system to
appeal to people to come to our store for our products and not have to worry about their safety.
The cost of capturing and preventing damages with security technology is considerably cheaper
than losing money during the evening hours without having improved security technology.
Another fact that the owner needs to take into consideration is that it is unethical for a
worker to work from the store’s opening (11 A.M) to the closing (4 A.M). There will be overtime
wages being paid if there is not a shift break meaning an opener and a closer worker. If there is
not a shift break, a worker would work seventeen hours straight. Not necessarily the liquor store
will be open until 4 am, but each hour after a person’s eight hour of work is overtime. This is
costly in both the short and long run. Since usually overtime is time in half pay. Adding this to
the cost of a new and better security system and the added cost from times-and-a-half from shift
after 12 A.M. These are unnecessary costs that can be resolved by two regular shift workers or
simply employing part-time workers to ensure profit margins are high.
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