James Beard owns a block of shops on a street just off Rodeo Drive. Of the 10 store spaces in the building, seven are rented by boutique owners, and three are vacant. James has decided that offering more services to stores in the mall would enable him to increase occupancy. He has decided to use one of the vacant spaces to provide, at cost, a giftwrapping service to shops in the mall. The boutiques are enthusiastic about the new service. Most of them are staffed minimally, which means that every time they have to wrap a gift, phones go unanswered and other customers in line grow impatient. James figured that the gift-wrapping service would incur the following costs: The store space would normally rent for $2,000 per month; part-time gift wrappers could be hired for $1,000 per month; and wrapping paper and ribbon would average $1.50 per gift. The boutique owners estimated the following number of gifts to be wrapped per month.
Number of Gifts
Store Wrapped per Month
The Paper Chase .......... 175
Reservation Art ............ 400
Kid-Sports .............. 100
Sugar Shack ............ 75
Designer Shoes ........... 20
Boutique de Donatessa ........ 130
Alan’s Drug and Sundries ......... 100
After the service had been in effect for six months, James calculated the following actual average monthly number of gifts wrapped for each of the stores.
Actual Average Number of Gifts
Store Wrapped per Month
The Paper Chase .......... 170
Reservation Art ........... 310
Kid-Sports ............. 240
Sugar Shack .............. 10
Designer Shoes ............ 50
Boutique de Donatessa ......... 200
Alan’s Drug and Sundries ....... 450
Required:
1. Calculate a single charging rate, on a per-gift basis, to be charged to the shops. Based on the shops’ actual number of gifts wrapped, how much would be charged to each shop using the single charging rate?
2. Based on the shops’ actual number of gifts wrapped, how much would be charged to each shop using the dual charging rate?
3. Which shops would prefer the single charging rate? Why? Which would prefer the dual charging rate, and why?
4. Several of the shop owners were angry about their bill for the gift-wrapping service. They pointed out that they were to be charged only for the cost of the service. How could you make a case for them?