Problem(Cases in Cost Management | 3rd Edition | Chapter 16, Problem 2Q)

a) For the LMC test market, what is the value to FLS in the first year from the Stardust Casino contract if FLS switched to CFL bulbs? Labor and equipment rental savings from long bulb life. This is the maximum amount which FLS might pay to ONA for the 8,000 new CFL bulbs (5,000 18-watt bulbs and 3,000 9-watt bulbs). Of course, FLS would also know that the casino was achieving large savings which might be shared with FLS and GINA.

b) What is the average annual saving to the Stardust Casino, over the fifteen year life of the retrofitted fixtures, of switching to CFL bulbs? Energy savings, less the retrofit charge, plus the value of reduced casino downtime. Assume the retrofit contractor earns a 40% gross margin and GIs captive finance subsidiary will finance the retrofit with a 15-year installment loan at 12% interest. This is maximum amount which the casino might be willing to pay to FLS for using CFL bulbs. Of course, the casino would also know that FLS was saving on change-over costs.

c) What price Should GINA charge for the 8,000 replacement bulbs each year?