The class should divide up into groups of three or four for this entire activity.
We have been attempting to come to grips with our parking-lot entrepreneurial success: people stand in long lines to buy our hot dogs at our current price of $1 each. They're waiting too long and some are giving up, taking their money elsewhere. Our grill space is maxed out, and we can't sell the dogs any faster without help. We tallied up all our costs and found it is costing us 80¢ to offer one more hot dog for sale. There are a number of things we can do. The question is, how are we to choose which option is the best one? Let's assume, for the time being, that our goal is to make as much money as we can.
Here is a table of options.
Choice Total Cost Effect on Production Effect on Profit Raise
the Price. . . Hire an
Employee. . . Expand
the Stand. . . Expand the
Product Line. . . But how in the world are we to fill in these blanks? We need information! The more of it we have, the easier it is to make any business decision. With a little trial-and-error, and some research, we discover the following things:
- Price. At our old price of $1.00, we were selling 200 hot dogs per day -- all we could produce, and we could've sold more. So we raised our price to $1.25 for a week, and sold an average of 175 per day. Then we raised our price to $1.50, and sold 150 per day. Things were going so well that we raised out price to $1.75, and sold 125 per day.
- An employee.We hired a helper for six hours a day, at $5 per hour. At our most profitable price -- based on the above data -- the helper enabled us to sell an average of 25% more hot dogs than before.
- Expanding the Stand. For an investment of $200, we can expand and remodel the stand such that it will be able to produce 100 more hot dogs (300 total) per day.
- Expanding the Product Line. Hamburgers didn't work out for us, but there might be an exciting prospect in foot-long hot dogs, in addition to the standard-length ones. We find that if we equip ourselves to bring fifty foot-longs per day to market, their marginal cost will be $1.25 apiece.
Now:
Using the data provided here, fill in the option chart above. If you do not know how to fill in any part of the chart, please identify the information you would need in order to fill it in.Then:
- Decide what steps your group would plan to take to expand your hot dog business.
- Tell what you expect the outcome to be.
- List variables that you are still uncertain about, and how you can find out what you need to know.
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