You are the manager in charge of Yoda Medical Center, a fine hospital on the far

Question

You are the manager in charge of Yoda Medical Center, a fine hospital on the far moon of Endor!   Currently you are spending $14000.00 per month renting an industrial washer and dryer from the Vadar Equipment Emporium.   Because of the size of your hospital , your staff does 11000 loads of laundry each month. The cost of the employee who loads the washer, transfers clothes to the dryer, removes the clothes from the dryer, folds them and puts them into the linen closet comes to $2.50 per load. The Hans-Solo Linen Company has offered to do your laundry for $19500 per month. You have determined that the cost for your staff   to transfer the dirty laundry to Hans-Solo, check in the clean linens from Hans-Solo and put them into the linen closet would be $1.35 per load.

Situation A: You have read over the Vadar Company lease and there is a clause where you can return the washer and dryer and only pay Vadar $7000 per month. Hence even if Hans-Solo does your laundry you still must pay Vadar the $7,000 each month.   Should you do your own laundry or let Hans-Solo do it? What is your change in income if Hans-Solo does your laundry? What is the break even number of loads?

Explanation / Answer

PRESENT COST Cost per load Rentals for equipments 14000 Staff cost on 11000 @ 2.50 each 27500 41500 3.77 OFFER BY HANS SOLO Fixed monthly laundry charges 19000 Staff cost of putting load etc 11000 loads @ 1.35 each load 14850 33850 3.08 SITUATION A WHERE VADAR IS PAID 7000 PER MONTH PRESENT COST Lease for equipments 7000 Staff cost on 11000 @ 2.50 each 27500 34500 3.14 OFFER BY HANS SOLO Lease for equipments 7000 Fixed monthly laundry charges 19000 Staff cost of putting load etc11000 loads @ 1.35 each load 14850 40850 3.71 SOLUTION: 1 From the above we see that without taking recourse to lease clause and return of equipments, the offer by Hans Solo is the lowest. 2 The break even number of loads is 4347 (rounded off). This is worked on the basis of difference of fixed cost in rental (14000) and fixed charges (19000) by Hans Solo. This difference of 5000 is divided by difference in per load variable cost of the two options which is 1.15(2.50-1.35) 5000 is divided by 1.15 which gives us the Break Even of 4347

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