A restaurant owner is currently setting up a new restaurant and making some basic decisions on how to fit it out. He is today making a decision on the facilities to place in the restrooms for customers to dry their hands. Initial research suggests that he has three options - paper towels, roller towels and hot air dryers. What should he consider in his decision-making process?
In the initial analysis, you might ask a number of questions, which will influence your decision.
- What type of restaurant is it going to be - luxurious, budget, middle-market?
- How many customers does he expect? (How many tables? Is it open during the day? In the evening?)
- Has he done any customer research to see what customers would prefer?
Fairly soon in the process, you should start asking questions about the economics of the three options - in which case the interviewer will give you some more information:
In the initial research, the restaurant owner has found out the following information from the suppliers of the drying facilities:
- Dryers have an initial cost of $500 each (but you'll need two - one for each restroom) and monthly service charge of $100 per month. The supplier estimates that the lifetime of a dryer is four years.
- Paper towels cost 5 cents each and the number of paper towels that you will need (varies directly) with the number of customers. So if you expect 50 customers a night, they will use 50 towels.
- If you use toweling rolls, they will cost $5 per roll (and again you'll need two - one for each restroom). The rolls will be changed daily if the restaurant has more than 2,000 customers per month or every other day if there are less than 2,000 customers per month.
At this point, it's obvious that from an economic standpoint, the option you select will vary with the number of customers. Therefore, it makes sense to look at a break-even calculation.
First of all, take the dryers. They cost $100 per month, plus an upfront charge of $1,000 that you should depreciate over their lifetime (i.e. an additional $1,000/(4 x 12) per month = $21 per month). Therefore their total cost is approximately $120 per month - and this does not vary with the number of customers coming into the restaurant.
Secondly, look at the paper towels option. These vary directly with the number of customers in the restaurant, at a cost of $0.05 per customer. Therefore with a low number of customers per month, paper towels will be cheaper than dryers will. How many customers would have to come to the restaurant each month to make the dryers more cost effective? The cost of towels would have to exceed $120 per month, equating to $120/$0.05 = 2,400 customers per month.
~Is this break-even affected by the rolls option? At less than 2,000 customers per month, the rolls would cost $10 every other day or $10 x 15 days = $150 per month. This in itself is more costly than both the dryer and the towels option, and with more than 2,000 customers, it will only look more unfavorable.
Therefore the real economic decision is between towels and dryers. At less than 2,400 customers per month (or 2,400/30 = 80 customers per night) you would prefer the towels. Once the number of customers increases above this, you'd switch to the dryers' option.
Following the economic analysis, you might mention a few more non-economic points that might sway the balance:
- Are there additional staff costs of cleaning up paper towel waste?
- How many suppliers of each option are there? If there is a single supplier, might he have the capacity to raise prices in the future?
Hints on quantitative cases:
- Make the numbers easy - round up or down when possible to make further calculations easier.
- When you're jotting down numbers, make sure you keep a track of what is what, so when you pull together your recommendations at the end of the analysis, you can make comparisons between the options.
- In break-even cases, it is sometimes effective to draw a graph to illustrate the break-even decision (in this case, number of customers per month along the x-axis vs. cost of drying option along the y-axis).