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Marys Big Decision

Our old friend Mary has finally decided to start providing tanning services at her salon. She has been convinced that providing tanning services will add much needed profitability. She is ready to purchase one unit, either a Deluxe Dome Unit, a Basic Dome Unit, or the Tanning Bed. Here is a summary of these alternatives. Please evaluate them and then answer the questions below. You will need to record the answers on the exam in FoxTale.

For the Deluxe Dome Unit, she will be hiring one employee full-time to manage the new services as well as clean and maintain the unit (paid $36,500 per year, including payroll taxes and benefits). For the Basic Dome Unit and the Tanning bed, she will hire an hourly employee to schedule, clean and maintain the unit (paid $17/hour).

Salon hours: Sunday Closed

Monday-Thursday 9 am 8 pm

Friday 9 am 10 pm

Saturday 9 am 2 pm

Depreciation method: Straight line

Tax rate: 35%

Deluxe Dome unit Basic Dome Unit Tanning Bed

Sales price per session $19.50 $16.50 $13.50

Cost $ 68,000 $32,500 $28,500

Installation costs $ 4,000 $ 1,000 $ 500

Electricity (annual) Cost = 2.75x + 10,000 Cost = 0.75x + 9,000 Cost = 0.75x + 6,000 R²= 0.95 R²= 0.65 R²= 0.62

Number of sessions/hour 5 4 4

Number of bulbs needed 10 22 28

Cost per bulb $45 $20 $25

Bulb life 200 hours 1,200 hours 700 hours

Annual insurance $ 1,250 $ 1,000 $ 500

Unit life 7 years 10 years 10 years

Tanning lotion 1 bottle / 10 sessions / $4 per bottle

Other variable costs/session $3.75 $0.50 $1.10

electricity (annual) 6000	=2.75x + 10,000 R^2=0.95	=0.75x + 9000 r^2=0.65	=0.75x + 6000 r^2=0.62
number of sessions/hour	5	4	4
number of bulbs needed	10	22	28
cost per bulb	$45	$20	$25
bulb life	200 hours	1200 hours	700 hours
annual insurance	$1,250	$1,000	$500
unit life	7 years	10 years	10 years
tanning lotion	1 bottle/10 sessions/$4 per bottle	1 bottle/10 sessions/$4 per bottle	1 bottle/10 sessions/$4 per bottle
other variable costs/session	$3.75	$0.50	$1.10

Required:

1. At what point (of sales in units) does the Basic Dome Unit become more profitable than the Tanning Bed?
2. How many sessions does she need to sell for the Deluxe Dome Unit to be the most profitable unit?

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