Question: Amos Doral owns a small store that rents punchbowls dishes

Amos Doral owns a small store that rents punchbowls, dishes, silverware, glassware, tables, and chairs to people having large parties. Amos runs the business by himself. He is considering adding power spray painters to his inventory of rentable items. A power spray painter is an electric air compressor and a paint sprayer used to paint or stain houses. Amos can lease the sprayers for $ 27 per week from a supplier. Amos expects he can rent the units for $ 38 per week. After each rental, Amos has to clean the sprayers with a solvent that costs $ 2 in materials per sprayer cleaned. Each customer is required to give Amos a credit card number for a deposit in case the sprayer is not returned or is damaged. Other rental companies report negligible losses due to theft or damage once the sprayer is secured with a credit card. Assume that sprayers are always rented for one- week periods and returned at the end of the week.

a. What fraction of the paint sprayers does Amos have to rent each week in order to break even? b. Is Amos considering all the relevant factors if he just focuses on the lease cost of $ 27 and the cleaning costs of $ 2 per unit? What other costs and benefits should he consider in his analysis? c. Before Amos signs the lease for the paint sprayers, he does some more research and discovers no other rental company in town rents sprayers. He decides to take out a yellow pages ad in the phone book for $ 25 per week and hire a part- time employee to clean the machines for $ 40 per week. Amos expects 90 percent of the sprayers can be rented each week. How many machines must Amos lease to break even?
d. Being the sole supplier of power spray painters in town, Amos realizes he has market power. After talking to rental companies in other towns, he concludes that the following equation captures the relation between the market demand for sprayers rented per week and price:
Rental price per sprayer = $ 69 - Quantity of sprayers
If Doral rents his sprayers using the above equation, he can rent all the sprayers that he leases. In other words, if Amos wants to rent 50 sprayers a week, he has to charge $ 19 per sprayer per week. Using the above price- quantity relation and the previous cost information ($ 27 weekly lease, $ 2 cleaning cost, and $ 65 per week for advertising and labor) AND assuming that all the sprayers he leases are rented each week, how many paint sprayers should Amos lease and what price should he charge?

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  • CreatedDecember 15, 2014
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