You were hired for a part-time job by Lizzo Gupta to provide her with financial advice in the operation of her limousine company. The L. Gupta Limousine Company operates a fleet of 10 limousines used for weddings, prom, and business events in Washington, D.C. Ms. Gupta charges customers a flat fee of $250 per car taken on contract plus an hourly fee of $80. Her income statement for May follows:

Revenue (200 contracts * $250) + (1,250 hours at $80 per hour)                                      $150,000

Operating Expenses:

            Drivers wages and benefits (1,250 hours at $36 per hour)        45,000

            Depreciation on limousines                                                       19,000

            Fuel costs (1,250 hours at $12.00 per hour)                              15,000

            Maintenance 18,400

            Liability and casualty insurance                                                  2,500

            Advertising                                                                                  10,500

Administrative expenses 24,200                                                           

Total expenses                                                                                                                 134,600

Operating Income                                                                                                         $ 15,400

All expenses are fixed, with the exception of driver wages and benefits and fuel costs, which are both variable per hour. During May, the company’s limousines were fully booked. In June, Ms. Gupta expects that her limousine company will be operating near capacity. Rhonda Khalifa, a prominent Washington socialite, has asked Gupta to bid on a large charity event she is hosting in late June. The limousine company Khalifa had hired has canceled at the last minute and she needs the service of five limousines for four hours. She will only hire L. Gupta Limousines if they take the entire job. Gupta checks her schedule and finds that she only has three limousines available that day. Gupta, however, could accept the job if she rents limousines from another company. If she were to rent limousines from another company, Gupta would still need to pay for fuel and driver wages for these cars for the Khalifa business.

Ms. Gupta has asked you to do some further analysis and to write her a memo letting her know how much she should be willing to pay for each limousine she rents from another company. In doing some further research you discover:

1. In order for L. Gupta Limousines to fulfill the Khalifa business, without renting additional limousines, she would have to (a) cancel two prom contracts each for one car for six hours, or (b) cancel one business event for three cars contracted for two hours each.

2. If L. Gupta Limousines does not get the Khalifa business, the three limousines currently available would go unrented.

What is the most that Gupta should offer another company per limousine in order to maximize Gupta’s short-term income and (b) some reasons why Gupta may wish to offer another limousine company more than the amount you found in part (a).

Answer rating: 100% (QA)

There are 2 Ways for Gupta 1Reject the Offer from Khalifa 2Accept the Offer From Khalif... View the full answer